Auctioned homes a risky business
Buying a foreclosed home is risky, real estate experts say, but with research,
diligence and maybe a little luck, it is possible to get a good deal on a good
home. And for first-time buyers, auctions may be good places to find a starter
home.
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“For young people, it’s a viable alternative” to searching for an affordable home through traditional avenues, said Joe Accetta, president and owner of Joseph W. Accetta & Associates in Cranston, who’s been in the real estate industry for almost 40 years. “But they may go to 50 auctions before they find a house. It’s a good idea, but only with some professional advice. You have to be vigilant.”
There are two kinds of foreclosed homes, which have been seized from owners who file for bankruptcy, fail to pay their mortgage or for some other reasons can no longer financially maintain their home. Homes sold before foreclosure go to auction and homes sold after foreclosure are handled much like homes sold through the normal buying process, Accetta said.
Susan Arnold, CEO of the Rhode Island Association of Realtors, said whether or not a foreclosed home is appropriate for a buyer depends on his risk tolerance, but said already affluent people are able to best rebound from a bad buy.
“Those who are well-off to begin with,” are best suited for this type of purchase, she said. “If you made a poor choice, for most people, especially a first-time homebuyer, it would be able to recover financially.”
Homes bought either before or after foreclosure do not come with seller disclosure forms that inform the potential buyer of any problems or a standard warranty deed.
“The financial institution has no knowledge of any imperfections in the home, like if there is a flood in the basement or the boiler burst,” Accetta said.
Foreclosed homes have bargain and sale deeds. Homes sold before foreclosure – the homeowner still has technical ownership – are auctioned off, sometimes for up to 70 percent off the market price.
“Many times it sold at a lesser price because it becomes OREO – other real estate owned – it’s owned by the financial institution but it’s not utilized in the institution’s business,” Accetta said. The bank needs to liquidate these unused assets in the form of the auction. “On the flip side, oftentimes these homes are not in the same quality condition” as a regular home sale.
Homes sold after foreclosure – the home doesn’t sell at auction, so the lender takes it back and tries to sell it in a more traditional way – are repaired to a minimum and put on the market. The locks are changed, the home, if needed, is winterized and given to a real estate agent to sell.
Accetta, also an auctioneer, teaches courses for Realtors and the public on understanding the auction process and buying and selling real estate at auction for the state’s Realtors association. Accetta has also been the chairman of the Rhode Island Real Estate Commission since 1984.
People who decide to purchase a foreclosed home must do their homework – go to city hall and find out the size of the house, the lot size, the home’s age and information on the deed, Accetta said. Municipal records can also tell a prospective buyer if there are any easements on the property, the condition of the home according to city records and any problems reported with the property at that time. Ask a local real estate agent to give an idea of the home’s value as well. And most importantly, Accetta encourages buyers who attend auctions and bid to keep a level head.
“Find out as much as you can because you’re not going to get it from the owner or the financial institution,” he said. “People get excited and lose their goal. I’ve seen people pay way more than what a home is worth because they get caught up in the moment.”
Accetta encouraged buyers to bring an agent with them to advise them, but Arnold said there is such a low rate of foreclosures in Rhode Island that there isn’t much of a market for real estate agents to advise on auctions.
There are people who go to auctions regularly, “professionals,” who purchase foreclosed homes, fix them up and resell them. Accetta suggested prospective buyers attend a few auctions, but only to observe, before placing a bid on a home.
As with all investments, there are benefits and risks with buying a foreclosed home at auction, Accetta said.
“You can’t get into the property” and inspect it beforehand, “so you’re buying it as is,” he said.
“It looks so easy from the outside, but if you bid on a property with a second mortgage, and it’s foreclosed, you inherit the first mortgage.”
The buyer only has 30 days to close on the property and there are no contingencies, Accetta said. If for any reason the buyer does not close in that time, he or she loses the deposit – usually about $5,000 – and can also be sued by the financial institution or lender.
“On one hand, you have the opportunity of perhaps picking it up at a lower price, but on the other hand, you’re under time constraints, you aren’t going through a traditional transaction, and it’s a big investment,” Arnold said.
Is it possible to get a good home for a good price? Accetta said yes.
“Is it fraught with peril – yes,” he said. “Do you have to do your homework – yes. You’re taking a risk.”
