Buying a Foreclosed Home Isn't Easy in Today's Market

Potential buyers — real estate investors as well as everyday folks looking for a good deal on a home — inspected the property lists posted outside the courtroom before filing into the crowded courtroom. The banks' representatives, easily recognizable in their dark suits, lugged around bulky suitcases and folders before taking seats in the front rows.

But once the auction began, the excitement faded away. One house after another sparked little enthusiasm among the buyers and was sold back to the bank carrying the mortgage.

In all, only 10 of the 30 houses for sale were bought by third parties. Mickey Higgins, who represents banks in foreclosure auctions, sold just one of 11 listings he had for that day. That's not unexpected, he says, as finding good deals in foreclosures these days is much harder than it has been in the recent past. "During the late 1990s and early 2000s, flippers had their glory days of buying houses and selling them at a profit," he says. "Now, even the professional investors who come here every week just sit with their hands in their pockets."

This may sound counterintuitive to just about anyone who reads the news. After all, the number of foreclosures on the market is rapidly increasing. In the first two months of 2007, the number of homes that went into foreclosure was up 12% nationwide compared with the same time last year, according to RealtyTrac.com, which tracks foreclosure data and provides access to such listings for a monthly fee. And that's just an average. In Nevada, which has the highest foreclosure rate in the nation, foreclosures were up 77% in February compared with the same time last year. (New York City saw a 47% increase between January and March this year compared with the same period in 2006, according to the Neighborhood Economic Development Advocacy Project, or NEDAP.)

This surge has spiked interest among the public and businesses alike. Earlier this month, Yahoo joined a multitude of services offering access to foreclosure listings with its new Foreclosure Center, formed in partnership with RealtyTrac. Foreclosure.com, which also provides access to listings for a fee, saw paid membership increase 35% this January and has grown at that pace every month since, according to its CEO Brad Geisen.

But whether these folks are finding any great deals is another story.

If anywhere, you'd expect foreclosure deals to be plentiful in Adams County, Colo. Last year, the region had one foreclosure listing for every 14 households, the highest rate in the state of Colorado, which is second only to Nevada in foreclosure rates nationwide. (And even in Nevada, the highest foreclosure rate was one for 30 households in Clark County.)

But that doesn't mean people are snatching up deals. Carol Snyder, who oversees foreclosure listings as Public Trustee for Adams County, says foreclosure auctions are quite uneventful. "Last week we had 114 properties that went to sale, and we had five people [attend]," she says. "One was bidding. And he bid on one property out of the 114."

The reason? Foreclosures aren't the quick path to riches many imagine. "Some people show up [at the auctions] to observe and see if it's something that's easy and a quick way to make money," she says. "A lot of them find out it takes a lot more work than they think."

To be sure, getting a deal on a foreclosed property isn't impossible. But before you cough up the $40 monthly fee for a foreclosure-listing web site or worse yet, hundreds of dollars for a seminar, make sure you fully understand the challenges.

That's especially true for mortgages taken at the height of the real estate market, says Jessica Davis, editor of Profile Publications, a listing of foreclosures and auction schedules for the New York City area. "The problem is a lot of the mortgages going into foreclosure now were made in 2005 and 2006," she says. "There's not a lot of wiggle room there." Many of these loans were made for more than 100% of the property.

Keep in mind, too, that at foreclosure the bank adds on to the mortgage cost any other interest and fees that have accumulated since the beginning of the process. Depending on how long ago the original owners stopped paying, thousands of dollars in interest and fees may be tacked onto the original mortgage.

All this makes deals that much harder to come by at the preforeclosure stage, as well, which is the time between the owner receiving a notice of default from the lender and the actual auction. During preforeclosure, investors can approach the homeowners with offers meant to benefit both sides: They'll buy the house for more than the homeowners owe the bank, but less than its actual market value. But if the home is worth less than what the homeowner owes the bank, such deals become impossible.

Indeed, facing a glut of foreclosed properties, some banks are now starting to lower their "asking" prices at auctions — their upset prices, in industry-speak, which are the sum of the outstanding mortgage and interest and fees — to make them more appealing to potential buyers. But this is still an emerging trend that hasn't caught up everywhere. Whether a lender will lower a property's upset price typically depends on where the property is and how many other foreclosures that lender is faced with, says Larry Loik, founder of the Real Estate Investor Network in California. It is possible to find such properties in Los Angeles County, for example, but not in Orange or Vernon Counties, Loik says.

And even if you see such "discounts," that's not to guarantee you're getting a house that is worth more than that on the market. Brad Charnas, an appraiser in Cleveland, Ohio — which in February 2007 had the second-largest number of foreclosed properties bought back by banks, according to RealtyTrac.com — say he has yet to see a foreclosed property sell for less than it's really worth. "They might sell for less than [regular] homes," Charnas says, "but that's because they're worth less."

Foreclosed homes are typically in worse condition than most, especially if the owners have been in financial difficulty for a while and have left the house in disarray. Utilities have likely been turned off, so you don't know if the piping or water tank work properly. In short, what you may save in home equity, expect to make up for in sweat equity.