Some REOs are No Deal for Anxious Home Buyers

By Sue McAllister

RISMEDIA, May 19, 2008-(MCT)-Renters Julie Herning and her husband Oliver have been trying to buy a home near San Jose’s Japantown since February. With a slow housing market, and with enough money for a healthy down payment, they figured they finally had a shot at owning a piece of property.

What they didn’t expect was the competition-so fierce that they’ve been outbid on four houses priced at around $500,000.

“It’s kind of crazy,” said Julie Herning. “One person I called said I would have been the 13th offer on the property.”

Bidding wars have remained common in high-priced places where stellar school districts are the big draw. But in an area like Santa Clara County, Calif.-with more than 900 houses for sale for $450,000 or less-many home buyers assumed that the market was soft and are shocked to find themselves outbid on foreclosed, bank-owned properties in this price range.

“The REO market is cooking hot right now,” said Jason Chan Lee of Intero Real Estate, who has numerous clients trying to buy REOs-real estate owned by banks and other financial institutions that have foreclosed on the properties.

Banks eager to unload their REO inventory-which forms a large chunk of the cheapest houses for sale in the county-have been lowering the listing prices. It’s become common to find bank-owned homes in South San Jose priced at roughly $400,000 that last sold in 2005 or 2006 for $600,000 or more, for example.

Lower prices have helped spur buyers’ interest in bank-owned homes, especially because “regular” sellers generally have not brought their asking prices down to meet the banks’ prices. Also, trying to buy homes in “short sales,” another option for entry-level buyers, has proven frustrating, time-consuming and often fruitless for many buyers.

A short sale occurs when a mortgage lender gives approval to homeowners to sell for less than they owe on their mortgage in an attempt to avoid foreclosure. The trouble is, lenders often take months to okay the transactions, the foreclosure happens after all, and the property becomes an REO.

With more demand for REOs, multiple offers abound, a phenomenon that has stunned some buyers, said Lee.

“It’s a secret nobody knows,” he said. “You have to write a full-price offer. If you want it, everybody wants it.”

The competitive landscape has discouraged the Hernings, who thought they’d have an easy time buying because “all you hear about is ‘Oh, the market is terrible,'” Herning said.

“We had no idea we’d still be sitting here going, ‘What’s going on? Are we going to find a house?'”

As with “regular” listings, it’s the bank-owned homes in the best condition that are most likely to attract a flood of offers. A bank-owned three-bedroom home for sale in South San Jose, for example, has new kitchen cabinets, a stainless steel dishwasher, and pristine Pergo floors, with views of downtown San Jose. It’s listed at $429,500, and got five offers after only two days on the market, said listing agent Peter Carey of Realty World.

But not all REOs are as inviting. A few blocks away at a three-bedroom bank-owned house listed for $389,900, dirty water is stagnating in the backyard pool, unfinished construction remains in the family room, and a bedroom has been painted haphazardly in a deep-red color.

One San Jose resident, a mobile-home owner who has been looking for a house since February with a budget of up to $550,000, bid unsuccessfully on several short sales and half a dozen REOs before getting a bank-owned house for $540,000 that was listed at $529,900. The buyer, who did not want to be identified, said he’s investing despite fears that valley home values may continue to fall.

“I have a feeling it’s still risky to buy a house at this moment, but I want my kids to go to a good school, so I’ll take a chance,” he said. “I might stay there for 10 years. I look for the long-term, not the short-term.”

Some agents who specialize in REOs said about half the buyers now scouring the market for deals on bank-owned properties are people who want to live in the homes, while the other half are seeking investment property to rent out. But even at today’s REO prices, some investors are waiting to buy because they can’t get enough monthly rental income to cover their mortgage and expenses.

True, said Peter Carey, but the ones buying now are “gambling on better times” in the future, he said, hoping to buy property in the $400,000s that will eventually gain value.

It’s not clear that the recent flurry of competition for REOs will last long.

Sen Dharmadas made an offer a few weeks ago on a bank-owned home in Los Gatos, Calif.-a rare find compared to the number of bank-owned properties available in nearby communities. He offered the full list price of $775,000, and his was the lowest in a field of about five offers, he said. He raised his bid by $12,000, but the bank chose another, higher offer.

“Because of that we almost lost hope,” said Dharmadas, a software engineer. “Getting an REO is very difficult.”