Foreclosure: Tips and Advice for Buying (or Walking Away from) a Foreclosed House

Fear and loathing in foreclosure: After falling in love with a house in foreclosure, a local couple decided to play “real estate roulette.” They lost. Or did they?



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foreclosure illustrationIllustration by Leo Acadia

It was time to make an offer. Buying a house from a bank has a big advantage, we learned. We could low-ball without repercussions. So we went in at $185,000 on a list price of $235,000. If you buy a house from real people, they might be insulted by such an offer and refuse to entertain another bid. Banks don’t care. They just see the figure. But that means they’re immune to emotional pleas as well. In all, we went back and forth 11 times in the span of about three weeks. Towards the end, the notes we appended to our bids saying that we were getting close to our ceiling, or that we were strong buyers who wanted to make a nice home for ourselves, fell on deaf ears. Even our “best-and-final offer” was answered with yet another counteroffer. Our wise realtor Jan Kaplan of Prudential Serls Prime Properties — who is lovely and patient and honest and knowledgeable and everything she stereotypically wasn’t supposed to be — recommended we hold firm. So we did. And the second time around the bank accepted our best-and-final offer of $210,000 with a $10,000 seller’s concession (a credit that helps pay for closing costs by sticking the amount on the back end of your mortgage, rather than making you pay it up-front).

From then on, everything was rushed. We came to an agreement towards the end of the day and were told we needed to find a lawyer by the next morning so that Fannie Mae, which owned the home, could send the paperwork. Weirdly, Fannie Mae both owned the house and underwrote the loans for our local credit union; essentially, this federally sponsored corporation would get paid for the house with its own money. We figured this would simplify things. We figured wrongly. Fannie Mae on the sell side agreed to the $10,000 concession. But Fannie Mae on the buy side nixed the idea, since closing costs weren’t going to be that high. Somehow, we became the go-between for different departments of the same company. So, after consulting with both Fannie Mae and Fannie Mae, we settled on a straight-up $200,000 sale with no money back.

They’d come down 35 grand and we’d gone up 15. We had set a cap and hadn’t gone over it. The prospect of owning a largely unknown quantity scared us enough; we weren’t going to overpay for it as well. Because a foreclosure is, to a large extent, a blank slate. The history of this 85-year-old house had been completely erased when the previous owner walked out. We didn’t know what its secrets were, what it had been through, where it had bled or wept or broken down. A surveyor had to tell us where the lot started and ended, exactly. And we knew we’d have to spend money on stupid little things you wouldn’t need to bother with in a regular house sale, like replacing the missing remote to the garage door; getting the alarm system reset because we wouldn’t have the codes; and bringing someone in to see how functional the water heating, forced air, and air-conditioning systems were. And that was all before we’d even done an inspection. We got an unusually tight five days to do our due diligence — two of which were over a weekend, and a third was a national holiday.

The prospect of owning a largely unknown quantity scared us enough; we weren’t going to overpay for it as well. Because a foreclosure is, to a large extent, a blank slate

Thankfully, the house was in decent shape, especially for a foreclosure. The marble-like stone on the outside was indestructible, and the original slate roof shingles only needed minor repairs. But the inspector thought the wrapping on the HVAC ducts in the basement might contain asbestos. He figured we could encapsulate it for about $600. It tested positive and since it was friable, an expert recommended that we have it removed, along with the ducts whose joints it was insulating. It was visibly brittle, and scraping it from the ducts could release particles into the air vents. The removal of the ducts was quoted at $3,150. Replacing them would be $4,500, plus $850 for air testing. That’s how a $600 fix turned into an $8,500 job. The bank agreed to knock $2,500 off the purchase price.

That wasn’t all, of course. Some knob-and-tube wiring had to come out. The upstairs and basement bathrooms were badly dated, the ground floor lacked a powder room, and the gutters were either broken or missing. We had no idea what kind of shape the appliances or cooling and heating systems were in. And that’s to say nothing of the yard. But then again, we were getting the place for less than half of the $393,000 it had been worth before the housing bubble popped.

We went into contract. They made very clear that we were purchasing the house “as is.” We’d buy it, and then we’d be on our own. Whatever issues might turn up afterwards were on us, there would be no legal recourse whatsoever. Fair enough.

The next step was securing a mortgage and home insurance. The former was straightforward; the latter not. We learned that most insurance companies won’t cover a house that’s sitting vacant. We explained that we’d be moving in within two months of closing, once we’d finished repairs and remodeling. But it was no use. Just one company would cover us, at a higher premium.

We cleared that hurdle, but the next one would trip us up.

(Continued on next page)

 

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