Foreclosures are cheap, but pitfalls may await buyers

ST. LOUIS – June 7, 2013 – Back in 2011, Christina and Brian Jenkins decided to take up a sideline as landlords. Since then, they’ve acquired three rental houses in the St. Louis area. Two of them were foreclosures.

They have advice for those who want to pick up a foreclosed house on the cheap, and it comes from a fairy tale.

“You have to go through a lot of frogs before you find a prince,” Christina Jenkins said.

The frogs may have ripped-out plumbing, or a crumbling roof or an air conditioner that disappeared. The princes sit in nice neighborhoods and need some paint, carpeting and other minor fixes.

The princes and frogs have one thing in common. They’re usually cheap compared with houses of similar size in the neighborhood. That’s what attracts landlords as well as would-be homeowners.

To a buyer, a foreclosure is a mystery house. The old homeowner is long gone, so there’s no one to fill out disclosure forms listing problems with the house.

Homeowners facing foreclosure do little maintenance, and the process can drag on for more than a year. Even with the homeowner gone, the house can sit vacant for months before the bank puts it on the market – time for roofs to start leaking, thieves to rip out the copper pipes, basements to fill up with water and mold to climb the walls.

That’s why buyers should make purchase offers contingent on a professional building inspection. The banks and government agencies that own foreclosed homes generally won’t make repairs. But at least the buyers will know what they’re getting into.

In the Jenkinses’ last foreclosure purchase, the carpet smelled and the house needed “elbow grease,” Christina Jenkins said. But the hardwood floors were pretty and the Jenkinses thought renters would like it.

They found themselves in a bidding war.

“There were multiple offers. We went back and forth two or three times – once after we gave them our ‘best and highest’ offer,” she said.

Bidding wars are becoming more common on the best foreclosures, real estate agents say.

“Usually, they’re priced pretty reasonably,” said Dennis Norman, who has negotiated many foreclosure sales at MORE Realtors in Chesterfield, Mo. “The buyer has to get there immediately. People flock to them.”

The bidding process can put off buyers, Norman said. Instead of replying to an offer quickly, the bank may sit back and collect several, then they ask bidders for their best and final bid.

To sweeten the pot, the Jenkinses took a chance and waived the building inspection on their last house. By that time, the couple figured they knew what they were doing.

“We can look past the ugly,” said Christina Jenkins. Instead, she looks for structural soundness. “Is it eaten by termites? Is there a flood problem? Is there mold?”

Then they calculate how much it will take to make it attractive to a renter. “It’s not just the value. It’s what we’ll have to put into it. Is it in the right neighborhood?” Landlords check ads for rentals in the neighborhood to get an idea of what rent to charge.

The Jenkinses got the idea to become landlords while helping a relative shop for a rental home. They saw the rents landlords were getting; compared it to prices of homes and saw a profit to be made. How much? The long-term return of the stock market is 8 percent, notes Christina, who is an accountant. Anything over that is gravy for an investor with a long horizon, and she’s anticipating gravy.

Adam Roberts is a rehabber. He looks for foreclosed houses he can buy for $100,000 to $130,000, fix up, then sell for $170,000 to $200,000.

Competition is fierce, he said. His last purchase was in Sunset Hills, Mo., and it drew 12 offers the first day it was on the market. “Lowball offers are not going to work,” he said. “The price they’re listed for is what they go for.”

To get a leg up on other buyers on the best homes, he won’t demand a home inspection contingency, and sometimes offers all-cash. Banks will sometimes take an offer $10,000 to $20,000 lower than the competition for a buyer offering cash and no contingencies.

On the other hand, some foreclosed properties are so bad that the bank doesn’t try to sell them. “They release the deed,” said Roberts, who also works in St. Louis County’s housing rehabilitation program. In effect, the bank abandons the property. “They become a liability of the county or the municipality,” Roberts said.

Copyright © 2013 St. Louis Post-Dispatch. Distributed by MCT Information Services.