You want to buy a bank-owned property. Your friends, family, mailman, dental hygienist ... even your Realtor have told you that the foreclosure market is where you pan for gold in this market. Lo and behold, the hygienist might actually be right this time (bummer about that last hot stock tip, though).
I am actually a late convert to the bank-owned frenzy because I have long been wary of purchasing property that lacks the standard disclosures, maintenance ... and humanity, if you will. Up until recently, it was often a mad rush for fool's gold, as well. The allure of "cheap" often masked an unreported truth: many foreclosure properties were actually priced at, or even above, market value.
Well, the worm has certainly turned. So much so, in fact, that I find myself seeking out the bank properties first in many instances as both the quality of the homes and value built into the prices have caught up with the hype. As more and more homeowners lose properties, it simply follows that they won't all be meth labs with peyote smoking derelicts squatting in underground bunkers in the backyard. Not all have had the A/Cs, appliances, cabinets, etc ripped out by the spurned former homeowner on the way out. Some folks have simply fallen on hard times, and have lost a perfectly habitable home to a bank that already has too many on its books. Thus the fire sale prices.
It can feel predatory, or at least akin to scavenging, to prey upon the misfortune of another, but buying up these lower end (pricewise) homes is critical to the health of the housing market. Until the excess glut is absorbed, supply will remain hopelessy out of whack with demand and values will continue to stagnate. As will the careers of countless professionals whose livelihoods depend on it. Realtors (I know, I know, we're cockroaches who will survive a nuclear housing holocaust), mortgage brokers and bankers, contractors, home inspectors, marketing reps, the sign guy, title officers, escrow officers, affiliated vendors, loan processors, underwriters, document couriers, secretaries ... it is absolutely staggering when you consider just how vital the health of the Real Estate market is to the vibrancy of our economy at large.
Buying a foreclosure home is a community service.
So, now that you have settled your qualms about purchasing a foreclosed property, there are a couple of things that you should bear in mind. We all know about the big hurdles with bank-owned property, I even touched on a few. Aside from the typical pitfalls, however, I'd like to address an area that most never even consider.
You may just get such a tremendous buy that you will get hammered unexpectedly on property taxes and homeowner's insurance.
Case in point, suppose your super duper agent finds a pocket of homes that were selling for over $1 million in 2006-2007. You jump on a smoking deal in the $500,000 range. Be prepared to pay property taxes based on the assessed value from the last year.
In other words, you are paying million dollar taxes on your new half million dollar home.
With the huge price drops, the tax evaluations have not caught up with the market yet. New evaluations come out in February, but they still might not accurately reflect the current landscape. As such, you must be prepared to ride out at least a year (this year's evaluation is prepared for next year's taxes. The die is already cast for the current year) with seemingly excessive taxes. You can bet that the county and city will act to offset the reduced property value with a higher tax rate as well. With the budget depending upon our taxes, they are likely to decline, but perhaps not as much as one would expect.
Homeowner's insurance could prove to be a higher than expected expense as well. The primary reason for this is the replacement cost of the structure. Some properties, especially newer custom homes, are selling for such bargain level prices that the sales price is not reflective of replacement cost. As such, while you might be expecting an insurance quote to strictly adhere to the sales price of the home, that is not necessarily accurate. You can't rebuild a million dollar home for 500k. Who said I slept through math class?
There are additional possibilities to consider such as HOA reserve/beautification impounds that may be required of a buyer at closing for high-end communities.
As with any purchase, value is dependent upon a confluence of variables. The opportunity for tremendous savings in the purchase prices of bank owned homes will typically outweigh many such potential bugaboos, but they can be far from incidental if you discover unforeseen expenses while sitting around the closing table.
So dive right into the foreclosure market if you are looking for a buy, but buckle your chin strap and call your trained Real Estate professional. You don't want to try this stuff at home.
Don't get bitten by what you didn't know you don't know.
Start your Scottsdale bank owned property search!
Subscribe to Paul's Scottsdale AZ Real Estate Chronicles by Email
Your source for Scottsdale Real Estate since the dawn of time ... or thereabouts.
Launch your Scottsdale Home Search now!
Paul,
It is critical for these homes to be absorbed back by buyers, and you're the first person I've read who has talked about the real estate taxes. We're financing one right now where the appraisal says $260,000 and the purchase price is $195,000. The taxes don't reflect the lower valuation.
Mike in Tucson
Great Post Paul...thanks for putting that out there. Luckily with the sale I have closing the end of the month I did use last years tax numbers in my figures for my client.
It ain't your usual foreclosure market.
For years, no decades, I avoided selling the foreclosure listings. They were always priced at market and rarely discounted for condition. It's a new time and a new market. Foreclosures are a growing percentage of the overall listing inventory and can't be ignored.
Further, it's a market segment of which the consumer is accutely aware and has an interest.
When we work with a home buyer, we search for location, price, etc. and include ALL listings including foreclosures and short sales.
It's inventory.
The assessed value needs to be adjusted by all counties and it's usually up to the new home owner to appeal their assessment.
With the budget problems counties are facing today, we can expect the real estate RATES to go up. More reason to stay on top of the assessed value.
I'm advising all of my buyers to appeal their assessments.
Paul, this is very well written and brings up points that I hadn't given a thought to. The taxes and property replacement insurance! I also hadn't really thought too much beyond Realtors and mortgage people when I was dishing out my sympathy and rolling in my pity party. There are many others who's livelihoods are affected by ours. Great post.
This hit me awhile ago, as I was showing foreclosures to a very novice buyer....I was thinking "wow, what a great house, you are LUCKY to get such a nice one for THIS low price!" The buyer said "these taxes are TOO HIGH! They must be nuts!" I could not get it through to her that this would be the case most of the time, exactly as you stated above....I could not get her to see it was SHE that really was getting a deal....so she ended up buying a "regular" home with tax value more in line with the price, she thought she was doing well, and didn't see the deals she passed by!
Foreclosures can be a myth for inexperienced buyers....and most especially first timers who "have heard" that they can get into a home for almost nothing....and then be prepared to...replace the furnace, roof....and oh the basement....and THEN get a loan......if it sounds tooooo good to be true...
Great points. The tax burden on the high end homes is eye opening to many people. I've seen some people who can buy a $500,000 home but if they could get a $1,000,000 home half price at foreclosure they wouldn't be able to afford the extra taxes.
I think that property taxes really need to be capped at some point.
A timely post here, thanks for the info.. as yet we don't have such a huge inventory of foreclosures in Austin but that time could be coming, I knew about the tax aspect but frankly had not thought of the insurance factor, great point. Thanks!
You've raised some very important points. I hear it over and over again---"I want a foreclosure." Then we all groan and start to plod forward to make it happen.
Appealing tax assessment is not hard in our market. We just have to take the appraisal in during the protest period and they adjust it. Insurance is another story because you can buy a home less than cost to build. So I make sure my buyers are aware of that fact and purchase insurance appropriately....
Extremely useful post.
Now if we could just get our municipalities to allow citizens to grieve their taxes on a rolling basis and not for a a 72 hour period in the spring, the dates and times of which are buried in an obscure corner of the city website.
Most governments have a mechanism for protesting property taxes that you can demonstrate are too high.
I've been successful in getting several lowered for clients over the years. It should be much easier now in fact I'm thinking of taking a shot at mine soon.
Paul,
You make some awesome points....
now is the time to make that purchase!
Isn't there a process of being able to appeal those taxes? I suppose it's a matter of researching it in your local area and informating your buyers. Thanks for the good post.
People who have purchased bank owned properties in this area have been successful in applying for a tax abatement nad having the assors review the closing docs and appraisals to reduce the tax assessment. Not always as low as they paid but lower however.
Hi Paul - I've had clients purchase "bank-owned properties" and it certainly is not an easy process. Business practices by banks have cause buyers' offers to fall off the table. I have had clients walk away and make an offer on another property because of the poor response by the seller.
All - the appeal process has been brought up by several. Every municipality has its own procedure for property tax objection, of course, and our window (in Maricopa County) is timely. The window for appealing this year's (2009) taxes has closed. A homeowner can appeal the new evaluation which comes out in February (upon which 2010's taxes will be based), but that will only help mitigate the expense for the coming year. The county works one year in the future, so if you miss the window this year to appeal next year's tax base ... you've got an even longer time at the higher amount than is most likely just.
Paul,
I was the one who said you slept through math class and now I have to take it back.....
Glynn County's Commission elected to have the tax assessor re-evaluate all properties to make sure they were fairly taxing.....they are keeping up with the times......
Excellent points and well written as always. I haven't dipped my toe in the water of foreclosures yet as we are late to the pool party but I am seeing more and more, that's for sure...especially short sales.
Great incites here Paul, as always. Many people do not realize the tax situation they may be in when purchasing a foreclosed property. I'm sure quite a few agents don't even realize it.
Regarding new homes that have been foreclosed, will there be a warranty? You would need to negotiate one. Will the home be completely finished? You would need to negotiate that out. And, among other things, get owner's title insurance.
Paul - you make an excellent point about the property valuation and taxes. Thanks for a great post!
Great post, Paul! You made excellent points here. It is important to stress to the clients that these great deals still have other costs that need to be considered when purchasing a home. Making them aware that they can go to their local assessor's office to ask that their property be re-assessed is helpful. I look forward to reading more of your blog in the future.
Timely post here, Paul. We started working with a bank to sell their properties a month or so ago. True that some lack "dignity" but there really are some good buys out there!
Paul: A great point to point out the pitfalls of foreclosure homes. One should research this information up front and ALWAYS buy title insureance.
Thanks for the great post, Paul. You make a great point about how taxes and insurance should be considered when figuring the cost of a home. While these homes do need to be sold to help a saturated market start to move forward, it is important we don't create future problems by getting people into homes that are great deals, but that they won't be able to afford to keep.
right on the money Paul, The quicker we absorb all of these foreclosures the sooner we will see a rebound.
Paul~
I love that written between the lines that concept of sustainable neighborhoods shines through here.
You're right, Paul. Getting these foreclosures off the books helps get the market stabilized. Buyers shouldn't think of purchasing these "deals" as predatory. They should look at it as a great investment to add to their portfolio. Possible income-producing or retirement homes is not a "predatory" act. You're right on the money, man.
Paul,
Congrats on a great post and feature.Right now in my market the foreclosures are the only ones selling so get on the train or change jobs!
It is critical to the stabilization of the housing market for these properties to be absorbed as quickly as possible. Thanks for pointing that out to everyone Paul.
There is a broad spectrum of condition in foreclosures as well as traditional homes. Some are in great condtion and reasonably priced, while others are in dreadful condition and sometimes overpriced. I think of foreclosures as just another seller. They respond rapidly and want to close the deal. Short sales are still very iffy. The response time is very long and one never knows if it will close.
Thanks for a very interesting and well written post. Buyers need to be aware of the in's and out's as it relates to foreclosed and short sale homes!
Many counties though are dropping assessed value. Here in San Bern county, prop 8 allows for the homeowner to petition the tax assessor to drop their taxes on the current value of the home, since home prices has dropped so incredibly. It's worth it to go through the process!
Great post! I just personally bought one forecloused and defintely a great buy if you know the market and area well. But the insurance cost was based on the cost of building a new one instead of the priced i paid.
Some good recommendations for someone considering buying in the foreclosure arena.
Good points all around! I would add that the numbers I just heard were that almost 50% of the homeowners in our area that contest their rates get an adjustment, so it's definitely worth questioning!
Great Post with some good points. I didnt' really think about the insurance payments until you mentioned it. Great information! Yes, I bet more people will be trying to get adjustments on their taxes when assessments come out.
The irony of buying property below market is that when enough people do it, that is the market. But, that's just an aside. Here in MD, foreclosures there are more short sales and foreclosures than you can shake a stick at.
So much new stuff to think about in the market these days. We are in uncharted waters. We need to keep passing along any new information that pops up. Everybody share!
Sarah Rummage in Nashville
It would seem buyers are getting hip to the idea that short sales and REOs may not be such a bargain with all the work that can go into just closing the deal. In an open house I did over the weekend several buyers asked me first thing through the door if it was a SS or REO. If so, they weren't interested. The only way this extra inventory is going to be absorbed is if banks do a better job of working with buyers. Too many buyers and realtors have put in a tremendous amount of work only to have the deal cancelled or fall apart, through no fault of their own.
Paul, Excellent post. I've had many buyers ask me how the taxes will be assessed if they buy a foreclosed home. I always recommend they call the ocunty and ask them the question. I don't think any of the counties are all that thrilled about lowering the taxes..more interested in raising them.
Excellent point you maid!! I didn't even think about it. Great post! Thanks for sharing!
Paul, I am putting this topic on my blog to do list--especially the part about taxes and insurance. I think the challenge with our job these days is providing enough information to the buyers so they at least stand a chance in understanding the various hurdles and departures from the norm.
Thanks for all that information! I really enjoyed your bog, it was very informative! I hope you have a great day!
Great article...Just last week in my market a Bank Owned home that the tax assessment says is worth $600,000 has a bank asking price of $350,000 My buyer bought up the exact question. I would be interested in buying it if I could get the tax evaluation down. I gave him the tax assessor's phone number to see what the procedure would be to lower the taxes. While yes it can be done, it won't happen overnight....there goes my sale?
I'm glad that you are seeing some "quality" in the REO marketplace. Unfortunately, Massachusetts hasn't yet caught up (last major market to see an increase in foreclosures, in many instances). Thus we are still in our infancy. There are realtors being sued because they forgot to turn off the water on a REO property (yes, the pipes have burst and the value for the structure of the homes have gone to basically nil), distressed homeowners are ripping copper pipe out of the homes, and generally trashing the home.
I've even seen half-eaten sandwiches in the house from when the sherriff came with the locksmith for a forced eviction three weeks back.
So, I'm glad that to hear that there is a pot of gold beyond the cloud-laden skys of the REO marketplace. Unfortunately, New England winters are just cold and nasty - maybe by May or June our REO market will have cleaned itself up.
Great points that you bring up especially with the buyer potentially being stuck with property taxes that reflect last year's assessed value. Thanks for sharing!
I shudder when I hear of the hygienist giving stock tips, the other day the guy who draws blood from me when I donate told me all about his new "side profession" as a short sale specialist...No, really. You are correct when you say that REO properties can be at or higher than market at times and I certainly agree that there are numerous headaches that attend each transaction as they change from lender to lender and even day to day. Ok with that said, I am sitting a house I bought from a lender in Hawaii in the early90's, it was an incredible pain and took six months to close however i knew (sort of) what I was getting in to and can only advise others to look at these opportunities with open minds and an expectation that there will be lessons in patience and tolerance!
I think buying a foreclosure is no different that a traditional. Have a home inspection and weigh the results and make a decision. Have you not ever had a seller lie or not disclose. As far as paying taxes on the higher amount, if you can prove your value they will lower theat least here in Florida.
I always explain to potential buyers that the taxes that are paid are on the assesed value and even though you are buying the home for bargain basement prices the tax man has a different opinion.
Can someone scratch behind my fifth leg. This roach seems to have lost his head. Hmmm... Whose frying baloney?
There must be some Raid left in the can. Just shake it up to get to those last hidden ounces. Can't let the gimpy one get away.
Does everybody take real estate advice from their dentist and gardener?!?!
Buying a bank owned home at fire-sale prices is always a headache. Make sure you call your doctor to get a script for migraine medicine first!!
There are a lot of things that people forget about with these homes... even the cost of heating and cooling are higher on the larget homes... and people forget about that, too.
I'm with Amanda, this is going on my blog to-do list. Or maybe I'll just copy and paste yours :)
Hi Paul, Congratulations, this is a wonderful and enlightening post. I had completely forgotten how property taxes are assessed in other states. I also forget to be grateful that we have our Prop 13 which provides for property tax to be based on the purchase price. 1.124 % .
Great read, I think you are definitely on to something about the distressed housing market, at least here in the Phoenix metro area.
GREAT POST !
lAURA,
Lisa, just between us girls, I am really just going to copy/paste this post as well.
Me too, Amanda ;)
...brilliantly written post Paul and a terrific point about taxes that will get overlooked by many who jump into buying short sales and foreclosures ...
Great info, great post !
Cheers !
Sheldon
Paul,
Great points about taxes and Homeowner;s insurance, which you are rights, without professional assistance home buyer's don't know that they wouldn't be assessed for taxes at the sales price. Also, I can only assume that city and town budgets reflected bigger tax bills and that they are not likely to reduce drastically or soon. They will eek it out as long as they can, I think. Look at Florida's real estate property tax issues they had last year at voting time. Taxes had gotten way out of hand.
Great inforamtion for the consumer Paul.
Everyone thinks they're an "expert" when it comes to real estate. They all know what their own property is worth, and why the neighbor's is worth less!