Are Distressed Homes Worth the Trouble?

November 11, 2009 | 151 Comments

Homebuyers are finding that the battered real-estate market offers just as many opportunities for headaches as for bargains.

Seth Grotzke and his wife, Crystal, both 25, recently bought a bank-owned 2 bedroom, 2 bathroom townhouse in Edina, Minn., for $110,000. Similar homes in the same development were selling for as much as $131,000. But exactly one day before the scheduled July closing, the Grotzkes learned there was a second, unpaid mortgage. Because of the foul-up, the couple was forced to live in Grotzke’s boss’s basement for more than a month. They finally closed on Aug. 31.

“We knew there would be title issues, but none that would last for that long,” says Grotzke, an assistant pastor. He adds that buying a foreclosed property is a way for God to “teach you patience.”

Lots of homebuyers are learning about patience these days. In August, nearly a third of overall housing sales were distress sales, according to the National Association of Realtors. That was up from 18% in March 2008, when the association began tracking such sales. The figure includes both foreclosures and so-called short sales, in which the lender agrees to accept less than the full balance of a mortgage in order to unload the property.

In some parts of the country, such as Bakersfield, Calif., Las Vegas and Lakeland, Fla., distressed properties constitute half or more of all sales. So far this year, there have been nearly 411,000 sales of U.S. properties in some stage of foreclosure, according to RealtyTrac, which publishes a national database of homes in default, auctions and bank-owned homes.

Those numbers aren’t making it any easier to buy distressed property. Bidding wars are erupting for the lowest-priced foreclosures. Experienced investors with cash are elbowing aside first-time buyers who need mortgages. And banks generally sell property “as is,” without the defect disclosures that are required of other owners. Short-sale buyers, for their part, often face delays of weeks or months as they wait to hear back from lenders — and from the institutional investors who bought securities based on the mortgages.



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