Helping Buyers Navigate Foreclosures

Illinois REALTORS share how they work with buyers of distressed properties.

Its 6 p.m. on a Thursday evening and REALTOR Rozanne Kurman of Re/Max Showcase in Long Grove is up to her ears in paperwork, hoping to get out of her office at a decent hour. Im sitting here tonight with eight offers on my desk for four different listings, says Kurman, who specializes in the distressed property market. Of those eight offers, she estimates just one will turn into a closed sale, namely because of the myriad misguided bargain hunters offering 50 cents on the dollar.

A 25-year veteran in real estate sales, Kurmans business has more than tripled since 2007 mainly due to growth in the foreclosure, short-sale and real estate owned

(REO) markets, despite the overall market slowdown.

According to the Mortgage Bankers Association, Illinois ranked 20 in delinquencies and 10 in foreclosures started in the fourth quarter of 2008 with 20 percent nonprime borrowers (FHA and subprime) versus a national average of 19 percent.

This wave of foreclosures and troubled loans has brought investors, first-time homebuyers and even second-home buyers out looking. The trend spells opportunity for agents who have educated themselves on the fine points of the foreclosure, short-sale and REO markets.

When buyers approach Kurman about purchasing a distressed property, she first points out that the sale will be as is, even if a home inspection is performed.

I let them know that every one of these homes has issues, and will probably need some work, says Kurman. Even the nicest-looking homes will have problems because theyve been abandoned and are vacant.

Next, she completes a broker price opinion (BPO) on the target property using three comparable sales and three current listings going back three months. The BPO helps the buyer come up with an offering price.

And even though buyers of foreclosed properties lack the typical wiggle room for getting sellers to handle repairs, Shanna Logsdon, a REALTOR with Coldwell Banker

Brown in Belleville, always advises her clients to spring for termite and home inspections.

They need to know what theyre getting into, especially if its a first-time homebuyer who, unlike an investor, isnt going to bring in a crew to tear down the walls and renovate the property, says Logsdon, who has seen her foreclosure buyers increase from one percent three years ago to 25 percent.

While Logsdon does not prospect for foreclosures, she can search the MLS for short sales and foreclosures, and she uses www.HUD.gov and the local courthouse as a source on properties going into foreclosure. To help buyers whittle down their choices from the vast pool of distressed properties on todays market, she gives clients a realistic picture of what inventory is available including the fact that many homes will come without appliancesor even furnaces. And while investors and experienced buyers can usually handle such issues, she warns her first-time buyers of the hassles that can come from buying foreclosures. Logsdon also reminds buyers thatunlike the scenarios that they see on HGTVthey probably wont be able to flip the properties for a lot of money.

Even though the homes are in a foreclosed state with reduced prices, the banks have still done their homework and know what the comps are, says Logsdon, who works with buyers to make sure they know that offering $60,000 less on an REO property priced at $150,000 is probably not the best approach.

Says Logsdon: Most will go conventional financing, and even then it takes a lot of work to be done to get the sale closed. I advise my buyers to work closely with their lenders, letting them know that theyre considering a foreclosure property, since that puts a different spin on the type of loan the buyers can qualify for.

At Novation Realty in Chicago, broker-owner Dominic Diorio encourages his buyers to not rush and take the process slowly particularly if its their first time buying a distressed property.

Once an offer is made, the bank will want the buyers to move on it, explains Diorio, who says 95 percent of his business involves foreclosures (www. novationrealty. net). Instead, I advise buyers to have a home inspection done to figure out if its the right fit, and then submit the offer.

Because the asset manager will allow the buyer to do the inspections before any addendums are drawn up, Diorio tells his clients to come up with an offering price that factors in any needed repairs, knowing that theyre purchasing the home as-is. Just how long the foreclosed properties take to close is another issue that many buyers are concerned about, namely due to clouded title issues that so often come up on distressed properties.

Daniel Nolan, a REALTOR-associate with Exit Realty Advantage in Arlington Heights, advises buyers to take a trip down to city hall to look at public records about the home before they sign a contract for all distressed properties.

Were not looking for gut rehabs because most of my clients wouldnt know how to do them even if they had a contractor, adds Nolan, who says 90 percent of his business involves foreclosures. We want low-impact housing that at most needs a coat of paint and carpeting.

On the financial side, Nolan also helps buyers determine the homes potential investment value for possible rental income. And while the foreclosure market isnt limited to savvy investors, the second-home buyers Nolan is working with are facing their own set of challenges, when it comes to financing.

I have two buyers right now who are looking for second homes, and who are still waiting to hear back on their loan applications, says Nolan. Its difficult for them because of what lenders are requiringsuch as high down paymentson those types of loans.

Bottom line, agents working in the foreclosure market can expect more paperwork, more phone calls and more hand-holding than the average sale. Logsdon says these sales dont require certain disclosures (e.g. Seller Disclosure and Radon Disclosure) and often are owned by out-of-state banks, making the agents role even more critical.

You really need to do your research, says Logsdon, and make sure that your clients are aware of what theyre walking into.

Managing Foreclosure Buyer Expectations

• Sales are as is
• Properties will need repairs and may be void of appliances or even a furnace
• It pays to pay for an inspection up front
• Factor in repairs for the offering price
• Do not expect to flip for a great profit
• Do not expect bargain-basement prices; banks know the comps
• Financing may be difficult if property is in extremely poor condition
• Patience is required; expect hassles and delays

How Bad Is It?

A closer look at foreclosure data sources

Its important to examine the facts behind foreclosure reports. While firms like RealtyTrac and DataQuick that release foreclosure activity are transparent about the way they report their foreclosure statistics, they are often misrepresented in the media. For example, RealtyTrac reports all the steps taken by banks as part of the foreclosure process (default, notice of a trustee sale, notice of foreclosure sale and real estate owned, or REO).

According the Mortgage Bankers Association (www.mbaa.org ), more than 92 percent of all mortgage holders are making their payments on time, and more than 97 percent are NOT in foreclosure. This leaves only 2.97 percent who are. During the Great Depression (approximately 1929-1939) more than half of all homeowners were defaulting on their mortgages. While todays situation is a difficult one, and a personal crisis for some families, it is not a national disaster.

National Association of REALTORS Surround Sound

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Whether youre working directly with asset managers,

with first-time homebuyers or with seasoned investors, successful navigation of the distressed housing market takes knowledge, experience and patience.

• Network with accountants, banks, lenders, legal counsel, and other
• REALTORS who are already immersed in the distressed
• property market
• Local boards of REALTORS are a good source for foreclosure and short-sale workshops
• National Association of REALTORS Field Guide to Foreclosures, www.realtor.org/library/library/fg329
• Illinois Association of REALTORS Short Sale Q&A and webcast, www.illinoisrealtor.org/Member/legal/short.asp