Foreclosure-heavy market entices investors

Denise Ogan had grown tired of looking at the eyesore in her Southern Hills neighborhood.

The 50-year-old structure had once been a custom-built home with "a lot of character and a lot of personal detail," she said. But the home at 2809 E. Normandy St. had fallen into disrepair and neglect after going into foreclosure in November.

"It was horrible the condition it was in," Ogan said. "It had water issues and odor issues. I've never walked into a house that was that bad."

Ogan took matters into her own hands. She spent an undisclosed amount to purchase the home in February through a real estate agent and renovated it for resale.

She said the three-month renovation process, which wrapped up in May, was as much about rejuvenating the neighborhood as it was about financial gain, though she does expect to turn a profit.

A growing market

Ogan is not alone in the foreclosure purchasing market, also known as real estate-owned, or REO. A survey released May 20 by RealtyTrac and Trulia.com showed 55 percent of U.S. adults are somewhat likely to consider purchasing a foreclosed home in the future, compared to 47 percent in November.

Most of the buyers planning such purchases anticipate a bargain; 40 percent of survey respondents expect to pay at least 50 percent less for a foreclosed home.

While Ogan was mum on how much she spent to buy and renovate the three-bedroom, 2,300-square-foot home, a deed of trust dated March 5, on file with the Greene County Recorder's Office, shows a loan from BancorpSouth for $122,800 for the property, though Ogan said she has invested a significant amount of her own money in the project as well.

Springfield Multilist data shows similar Southern Hills homes are listed with sales prices between $180,000 and $200,000.

RealtyTrac lists 1,491 foreclosed properties available in Greene County as of May 21, with betwen 150 and 200 new foreclosure properties entering the market each month.The recorder's office lists 407 trustee's deed sales - an indicator of foreclosed properties - between Jan. 1 and May 25.

Local Realtor John Heitz, who specializes in selling foreclosed properties, thinks the numbers will continue to grow as banks that have been holding homes to keep the assets on their books slowly put properties up for sale.

He also said that government programs encouraging troubled homeowners and lenders to work out their mortgage terms before going into foreclosure are delaying the inevitable rush of new bank-owned properties entering the market.

"The government has these banks in a state of limbo," Heitz said. "You might have someone six months behind, trying to work on a deal that the government has just come out with to try to maintain ownership of the property. I have read that 60 percent of bank properties in default haven't come on the market yet, and I think that's pretty accurate."

Entering the fray

While purchasing foreclosed properties can be a bargain, and renovating them does have a positive impact on the surrounding neighborhoods, those who are willing to do their homework also can use the properties as successful investment vehicles.

The first step for buyers is securing preapproved financing.

"That prequalification cannot be tied into the condition of the property, because most of the time you're buying the properties as they are," said Scott Sturm, real estate agent with Coldwell Banker Vanguard. "They might be able to get a loan for a (Federal Housing Authority)-conforming house, but they can't always get a loan for a house in distress."

Sturm, who in the past has purchased six foreclosed homes to renovate and resell, said potential buyers also need to know that uncertainty is part of the process. He quotes a well-known saying in the real-estate-owned property market: "If you can't go with the flow, don't buy REO."

Sturm, who has sold four of the six foreclosed homes he purchased, said that, on average, an investor purchasing a foreclosed home for resale can expect to make $8,000 to $10,000 after expenses and repair costs.

Heitz noted that the financial institution that owns the property can play a key role in the success and speed of a foreclosure sale.

"Some banks are very easy to deal with; you send them the information and they get back in touch immediately," Heitz said. "Others are an absolute nightmare to work with. You could put an offer in on a house, and it could take two weeks or three weeks for the bank to even respond."

Jumping the hurdles

Even if the bank that owns a foreclosed home accepts an offer, problems can still crop up, sometimes as a result of the home's condition.

Sturm points to an example of a collapsed sewer line in one of the foreclosed homes he bought.

"Luckily, I had purchased the home at a big enough discount that there was money built in for the possibility of major repairs," Sturm said.

The home's title also can be a source of aggravation. Heitz said that about 20 percent of the REO homes he deals with have some title issues.

"The title could have not been recorded properly, or there'll be some error somewhere that has to be corrected, and that takes additional time," he said.

Despite the aggravation, many feel that foreclosure purchases can be very rewarding.

For Ogan, while there is an expected financial windfall from the process, she feels more reward from what the project has done for her fellow Southern Hills residents.

"The neighbors were elated. The older people across the street remember when it was originally built, so to see it go downhill like that was sad," Ogan said. "To bring it back like that sure made some happy neighbors. I'd say it's back to its original glory."