Foreclosure Sales Offer
Deals on High-End Homes
By
JUNE FLETCHER
Staff Reporter of The Wall Street Journal
From
The Wall Street Journal Online
July 07, 2004 -- Alan Shams just
bought a 7,700-square-foot lakefront Las Vegas vacation home with
five bedrooms, a pool and a waterfall in the backyard. But the best
part of all was the price: At $1 million, the house cost $600,000
less than the previous owner paid three years ago, in one of the
country's hottest real-estate markets.
But Mr. Shams bought his new luxury
home in a foreclosure sale. A local bank had acquired it from the
previous owner after he defaulted on his mortgage. Mr. Shams, a
Virginia commercial-property investor, says buying a home this way
was much easier than going through a regular sale, since he didn't
haggle over price or move-in dates with the seller. "You buy. It's
yours," he says.
In some places these days, the best
spot to look for a million-dollar mansion may be the bank or the
courthouse. Foreclosures are running at 1.27% of all mortgage loans,
up 14% since 2000, according to the Mortgage Bankers Association. In
the first five months of this year, 113,362 foreclosed homes came on
the U.S. market, up 56% from the same period last year, according to
ForeclosureFreeSearch, a Boca Raton, Fla., firm that tracks
foreclosed homes for sale.
And with interest rates expected to
rise, mortgage rates are likely to follow, putting pressure on
financially overextended homeowners. "People have been borrowing way
too much," says Foreclosures.com Chief Executive Officer Tim McGee.
"We're experiencing the effects of yuppie fatigue."
Distressed
Mansions
While the stereotype is that
foreclosures don't happen in the best neighborhoods, they actually
occur in every price range -- and foreclosures on high-end homes
occur in about the same proportion as they do on other homes. So,
when foreclosures overall rise, high-end ones do, also. In Silicon
Valley alone, Foreclosures.com says that only one home was listed on
its site last year for more than $1 million; now, there are 16.
Foreclosures can mean some surprising
bargains, primarily because banks don't want to be in the real-estate
business and price their properties to move fast. In Calistoga,
Calif., a bank is asking $1 million for a six-bedroom house that sold
three years ago for $2.6 million. In Fort Worth, Texas, a bank has
just lowered the price of a 7,700-square-foot home to $1.3 million,
down from the bank's original asking price of $1.5 million. And in
Las Vegas, a five-bedroom home was just sold by a bank for $1.5
million, $400,000 less than the original asking price. In foreclosed
million-dollar-and-up homes, "the deals are out there," says
Portland, Ore., broker Jim Doak.
There are drawbacks to buying a house
that came on the market due to hardship. In some situations, former
owners are bitter and even sabotage the house, removing appliances
and fixtures. Dan Humeston, a Las Vegas broker, says he's found holes
punched in the walls of million-dollar homes, and concrete poured
down the toilet.
In other cases, financially strapped
owners have allowed the home to fall into disrepair. The foreclosure
process typically takes about four months, sometimes leaving the
grass uncut and the pool a slimy green. The Calistoga, Calif.,
six-bedroom home that's on the market for $1 million has no
insulation -- and termites. As for Mr. Shams, he says he'll need to
spend $150,000 on his house upgrading the old carpet, worn tile
floors and out-of-date kitchen.
There are several ways to buy a house
in foreclosure. Bruce Venturelli, a Santa Barbara, Calif., broker,
says that typically 10 properties priced over $1 million fall into
default in his market each year, but only one or two get as far as
being sold at auction or by the bank. Most are actually sold in
"pre-foreclosure" sales to individuals who scour legal postings for
Notices of Default (homes with mortgage payments in arrears).
Buyers can get first crack at homes
this way but they have to be prepared to make an offer immediately.
And they must deal with emotional owners who may not want to leave
and who may be warring with a sibling or spouse. Or there may be
angry tenants to evict.
Armed with a Checkbook
Though laws vary, owners generally
have four months to pay their debts. If they don't, lienholders can
force the house to go on the auction block -- not some fancy venue
like Sotheby's, but rather the courthouse steps. Anyone can buy there
(such sales are advertised in the classifieds of local newspapers),
but most people don't, since bidders usually have to come with a
check equal to at least 10% of the expected purchase price. Most of
the time, the successful bidder is the bank, which takes over the
house for what it's owed. At this point, the house officially turns
into a "foreclosed" home. Foreclosed properties are available through
brokers who specialize in so-called REO's, or real-estate-owned
properties, and are listed on Web sites like REO.com.
Right now, bargains in luxury homes
are easiest to find in overbuilt or resort areas, particularly in
Colorado, Arizona, Texas and Utah, brokers say. Four years ago, Park
City, Utah, developer John Benson built an 8,500-square-foot second
home with seven bedrooms, nine baths, a home theater and a panoramic
view of the Deer Valley ski area. Then, Mr. Benson says, business
reversals and serious medical problems caused him financial problems.
"Everything hit me at once," he says. Last year the house went into
foreclosure.
Brad Olsen, the agent handling the
sale, says the home has been on the market for more than five months
because the Park City region was so overbuilt after the 2002 Winter
Olympics. Appraised for $2.6 million upon completion in 2001, it is
now available for $1.7 million, furniture included. "You can get a
bargain," he says.
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