Foreclosures will play a significant role in home sales for at least the next two to three years
Chicago, IL (Vocus) September 1, 2010
The nationwide surge in home foreclosures signals both economic struggle and opportunity. Across the seven-county metropolitan Chicago real estate market, foreclosures accounted for 10,439, or 27 percent, of all homes sales tracked by Midwest Real Estate Data, LLC, during the first half of 2010.
“Foreclosures will play a significant role in home sales for at least the next two to three years,” remarked Jim Merrion, regional director of the RE/MAX Northern Illinois real estate network. “The idea of getting a foreclosed home at a bargain price is enticing, but shopping the foreclosure market is quite different from buying a traditional existing home, and buyers need to understand how things work in this unique market.”
Bargain hunters considering foreclosures include a substantial number of investors. Merrion estimates that investors now account for 40 percent of all foreclosure purchases in the metro Chicago area.
Linda O’Donnell of RE/MAX Signature, Chicago, has handled the sale of more than 380 foreclosures in the last year, and she attributes the strong demand for those properties to a convergence of several factors.
“Foreclosures currently offer outstanding values, especially in contrast to the home prices we saw a few years ago,” said O’Donnell. “When you combine that with the low cost of mortgage financing and the wide selection of homes, it’s no surprise that buyers view foreclosures as a huge opportunity.”
She adds that while stories about vandalized or poorly maintained foreclosed homes are common, many are in good condition.
“We urge the institutions selling these homes to fix them before we list them because the properties will sell faster, command a better price and be easier for buyers to finance,” said O’Donnell.
According to Edward Lukasik, Jr., a foreclosure specialist with RE/MAX Professionals in Bolingbrook, Ill., among foreclosure buyers seeking a home for themselves, 65 percent are first-time buyers, and in most instances they will be happiest with a home that requires a minimum of work.
“Properties in nice condition usually sell fastest, so if that’s what you want, it is essential to have financing all lined up when presenting an offer,” he said. “Otherwise you may lose the property to another buyer who can demonstrate an ability to buy immediately.”
Lukasik, who has sold more than 190 foreclosures in the last year, said that foreclosures in poor condition are better left to investors experienced in doing rehab projects, and he advises investors to decide upfront whether their strategy is to retain the property as a rental or to fix up and resell quickly.
“If you are going fix up and resell, you have to be a cash buyer and then have a credit line or enough additional cash to make needed repairs and hold the home until it sells,” he said. “You must understand potential costs thoroughly, so it’s best to start with smaller homes. That way, if you underestimate the costs, the amount isn’t too large.”
Lukasik urges investors planning to buy and hold to develop solid answers to some basic questions:
1. What type of unit do you want?
2. What kind of rents can be expected from that unit in a specific location?
3. Will those rents cover operating costs and provide a reasonable return on your investment?
He also advises those buyers to have a year’s worth of cash reserves (mortgage payments, taxes and insurance) in case there are problems with vacancy or delinquency.
“Ample reserves let you be more selective about tenants,” he said.
For buyers who want to occupy the home they purchase, one attractive alternative can be a foreclosure offered by HUD, the U.S. Department of Housing and Urban Development, according to Ronald Gersch, an associate at RE/MAX Realty of Joliet in Joliet, Ill. Over the last 12 months Gersch has been involved in selling 135 foreclosures, many of them HUD properties.
“HUD primarily markets foreclosures to owner occupants. In fact, for the first 10 days HUD foreclosures are on the market, they can be purchased only by owner-occupants,” Gersch said. “Quite often, buyers can move into a HUD foreclosure with a $100 down payment and a total outlay of less than $2,000.
“HUD may be the only entity selling foreclosures that cares more about the buyer than about its own interests. I’ve never seen HUD hold a buyer to a contract if there is something wrong with a home. HUD does its own inspection of each property and happily identifies any problems they find, even small ones. They want people to be OK.”
Tina Eisler of RE/MAX Property Source in Rockford, Ill., who has sold more than 100 foreclosure properties in the last 12 months, notes that while foreclosure buyers will benefit by getting a discounted price, they will pay for that discount in extra time invested and energy spent.
“Every institution selling foreclosures takes its own approach to the process,” explained Eisler. For that reason, she stresses the importance of buyers being patient, noting that the sales process moves at the convenience of the foreclosure seller, not the buyer. For example, buyers will want the water turned on for their home inspection, but often the water is not on and getting that corrected can take time.
“So many institutions are selling foreclosures, each with its own set of procedures, that it’s difficult for buyers and even for agents to be familiar with all of them,” Eisler said. “That’s why it is so important, once a property is singled out, for buyers and their agents to be sure they understand the seller’s requirements.
“If you submit the wrong paperwork or documentation, things won’t move ahead. Buyers should be able to rely on their agent to find out what’s needed and basically quarterback the process. Buyers should look for an agent who is extremely diligent and strong on detail.”