Bank-owned homes are real estate's new gold rush

Julia and Gary Draper are in escrow for a house where the lawn is overgrown, the carpet needs replacing and the fence blew down in a January storm.

Not surprisingly, a bank has owned the place for months.

But at $170,000 for three bedrooms in Rio Linda, it is their dream come true. The Drapers are among the nearly six in 10 buyers in Sacramento County whose house-buying odyssey currently ends with a home bought from a bank.

"Just be calm and relax, because it is very stressful," says Julia Draper, 37, when asked her advice on shopping for foreclosure bargains.

For thousands of people shut out of the housing market as prices doubled between 2001 and 2006, bank-owned homes are real estate's new gold rush. With more than 10,000 foreclosures last year in the eight-county capital region, the plentiful inventory of bank-owned homes has fueled a mini-boom in buying. It's even sparked "foreclosure tours" by bus, van and limousine.

In the last two months, buyers in the Sacramento region have scooped up more than 2,000 foreclosed homes, a 10-fold increase from the same period a year ago, according to DataQuick Information Systems in La Jolla.

But buying houses from a faceless bank is different than buying from the neighborhood couple moving to Portland. "Buyer beware" is the watchword with a bank-owned home sale.

Unlike a traditional transaction, there are no disclosures of potential problems, no seller-paid inspections, and houses are sold "as is." Furthermore, banks won't accept offers contingent on selling another house, and "lowballing" generally doesn't work.

And with investors crowding the field, competition for the best deals can be heartbreaking.

"We ended up looking at probably 30 or so houses. We put offers on five and were outbid … mostly by investors and other families," said Draper, a Rio Linda waitress and mother of two.

Real estate agents who specialize in bank-owned homes say a wave of bank repos will be flooding the market this spring and summer. Nearly 3,500 new foreclosures occurred in the capital region in January and February, according to Foreclosures.com, a Fair Oaks-based Web site for real estate investors.

So if you're thinking now is the time to buy a bank-owned house – known in the industry as "real estate owned" or REO – here are some considerations:

• "The No. 1 thing a first-time buyer needs is to be approved by a reliable lender," says Roseville real estate agent Jan Zebley. "Most of these banks won't even look at your offer without a letter from a lender, and sometimes two."

Draper says some banks require that you finance through them if buying their houses. That can lead to extra paperwork if you're making offers on multiple properties owned by different banks.

"We've probably had 10 checks on our credit in the past three months," she says.

• "Make sure you get enough discount to take care of things that happen with foreclosure," like unnoticed damage, deferred maintenance and other necessary repairs, adds Alexis McGee, president of Foreclosures.com.

And don't fall for someone else's opinion that it's a great deal simply because it's valued at $125,000 less than two years ago. Check comparable prices in the neighborhood.

• "The best deals you can get with REOs are those with the (longest times) on the market, usually 90 to 120 days," says agent Ian Maker, owner of REO Deal Makers Inc., in Rancho Cordova. These "seasoned" or "distressed" properties are those "where banks want to wash their hands of it and move on."

• Don't think you're going to steal one of these houses by offering 40 percent below the bank's asking price, says Bruce Slaton, an REO agent and owner of Bruce Slaton & Co. in Sacramento.

Bank-owned homes typically sell within 10 percent to 20 percent of their listing price, according to local agents.

• Pay for your own inspection report and factor in the cost of repairs. Unlike individual sellers who must disclose what they know about their home's condition, banks are exempt because they've never lived in the home.

About the writer:

• Call The Bee's Jim Wasserman, (916) 321-1102.