What About Foreclosures?

Tonight, a client who has been looking for some time now asks me about foreclosures. Here’s what I wrote back:

Yes, there are good values in foreclosures and most of the activity took place last year. It’s a different set of challenges that can be overwhelming but worthwhile. For example, we managed to get a studio condominium in Diamond Heights for $180,000 cash that is now worth at least $230,000 with steady rental income. Keep in mind that we saw foreclosures all over the spectrum – consider the St. Regis penthouse for example, we’ve seen a lot of activity mainly in the lower end of the marketplace.

Think about it this way: any economic cycle will touch the lower end of the market faster. Values will fall and rise faster at this and of the market because the people who previously couldn’t afford anything will be able to buy the most accessible properties. Conversely, when the economy tanks people who bought the cheap houses – relatively speaking – are mostly those who are unable to afford their mortgages when times get tough because they may not have had the best mortgage for the long-term. Combined with the fact that the mortgages were inflated to the first place then we got some serious issues. The foreclosures that I can recall in the city are the following:

There was a two-bedroom, two-bath, deeded parking condominium unit at the Brennan that was listed around $799,000 but closed somewhere near 1.3 million. There were tenants and back dues of $32,000.

There was a five-story house over in Bernal Heights. The price, nearly $600,000, and vacant. Problem was that none of the remodeling that took place inside the house that divided in into one of the most jumbled living areas I’ve ever seen, appears to been permitted.

A good deal of foreclosed homes were in the Beacon – right across the ballpark– board in Hunters Point Bayview. The issue with the Beacon is that none of the lenders will give you a loan on the building unless you have at least 35% down because of ongoing litigation that has dragged on for at least seven years. The latest lawsuit appears to be a $20 million lawsuit based on HVAC defects.

This is not to say that the new rules won’t release more inventory. Many times homes that might otherwise be destined to become foreclosures will be sold as short sales first. If that fails online auctions or steps of courthouse auctions are typically the means by which banks with themselves of these REO – real estate owned assets. Other times, the banks will have intermediate portfolio management companies handle the sale of these homes.

In any case, a repossessed home in the condominium tends to fare a little better than a standalone detached home. Reason being is that other neighbors of a condominium and homeowner association are bound to at least take minimal care of the empty property as would otherwise hurt their property values more than s neighbor’s foreclosure already will. Stand-alone homes or detached homes may not get that care and, can become neighborhood blight and easily fall into disrepair.

Buyer beware.