This Old Foreclosure

Buying directly from a bank avoids some risks, but don't expect a steal

Tiffany and Scott Romero almost passed up the five-bedroom house they recently bought in the San Diego suburb of Temecula, Calif. It was hard to ignore the dead lawn, dirty carpeting, scuffed walls, and ugly kitchen tiles. No wonder the house had been sitting vacant for five months.

But the property was in a good school district, and it was in foreclosure. The schools drew them to the neighborhood, and the tenuous status of the house gave them a chance to shave $25,000 off the bank's $465,000 asking price, which was already $75,000 lower than comparable homes sold in the area a year ago. It helped that the Romeros were buying their property directly from the bank that held the mortgage, rather than purchasing it sight unseen at auction or directly from a distressed homeowner. They were able to inspect the house before buying, and they got to negotiate on the price.

Anyone else hoping to take advantage of the more than 2.5 million mortgages expected to go into foreclosure this year should consider the same strategy. Until lately, most foreclosed properties were snapped up at auction. But increasingly, they're being sold by real estate agents on behalf of banks. In industry speak, they are called real-estate owned properties (REOs).

Going the REO route has fewer pitfalls than other methods of buying a foreclosed house. With an REO, "there are no title problems, no liens, no clouds," says Todd Beitler, co-author of The Complete Idiot's Guide to Foreclosures and president of the Real Estate Library, an online resource on foreclosed properties. "The homeowner has been removed, so you don't have to evict anyone. It's all free and clear."

The changing dynamics of the real estate market are a big reason why more foreclosed homes are ending up in local agents' hands. In the past, real estate speculators tended to buy foreclosed properties at auction. But these days the pros are sitting on the sidelines, either because they're tapped out or think home prices will continue to fall. That leaves the market wide open for people like the Romeros who are looking for a deal on a place to raise a family. These buyers are less comfortable bidding at an auction; to accommodate them, more banks are selling their foreclosed inventory through agents. "Up until a year ago, all the good foreclosed properties were bought off the courthouse steps," says Diane Pelletier at Lancaster Town & Country Realty in Jacksonville, Fla.

That's great news, especially since you can save 5% to 15% off the market value by buying directly from a lender. Your best bet is to find one with extensive REO experience since the negotiations with a bank can be slow going. A good resource is the National REO Brokers Assn. (, which offers a database of agents sortable by state, county, and Zip Code.

If you plan to take out a mortgage, it's important to get your financing in order well ahead of time. "Make sure you have your loan money lined up," says Sharon Collins, a real estate agent at RE/MAX Realty Consultants in Winston-Salem, N.C. She has seen many deals fizzle in recent months as mortgage companies went out of business. The bank selling you the foreclosed property is generally not interested in financing it. So you need to find another lender and, if possible, even get approval for a backup mortgage in case the first one falls through.

In this dicey market, not just anyone can swoop in and snag a bargain. Folks like the Romeros, who had high credit scores and the ability to make a $100,000 down payment, hold the power when negotiating for bank-owned properties. For the Romeros, sodding the lawn, replacing the tiles, and fixing other cosmetic flaws cost them just $10,000, less than half the money they knocked off the price. Even better, they got the bank to give them a one-year warranty on the property, which has already covered a broken air-conditioning unit. So while they didn't make a killing in the foreclosure market, they came out comfortably ahead and found a great place to live.

By Lauren Young

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