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Text File | 1993-09-06 | 18KB | 349 lines

Real Bargains You're probably familiar with what has happened to real estate in the past few years. Many properties such as homes and condos and shopping centers, have gone into foreclosure because borrowers failed to make loan payments and owners came up short on property tax. In fact, the entire S & L crisis was triggered by real estate failures. Thus, a lot of real estate is now held by one-time lenders or municipalities who have become unwilling owners. Often, the new owners are government agencies, from local taxing authorities on up to the federal Resolution Trust Corporation. These government owners want to get the real estate out of their hands and back onto the tax rolls. Their frequent method of disposal is the auction. Nearly $4 billion worth of real estate is sold at auction each year. In the current economy, real estate bargains may be extraordinary. Buyers sometimes pay as little as 50% of earlier asking prices. In one Southern state, a buyer discovered a 40-acre ranch that was being auctioned by local authorities because property taxes had not been paid. He bought the ranch, which included a modern house, swimming pool, and two-car garage, for under $10,000! An appraiser put the value of the property at well over $100,000! The GSA, a major auctioneer of surplus property, is also heavily involved in real estate auctions. Call or write your local GSA office and ask for a booklet that will give you the procedure to follow to order the regularly issued "U.S. Real Property Sales List." There's no mailing list, so you need to send in the order blank from each issue in order to get the next one. Another government source for real estate is the U.S. Department of Housing and Urban Development (HUD). When a borrower defaults on a Federal Housing Administration (FHA) loan and a lender forecloses, HUD buys out the lender and takes over the property. Then HUD sells the property to the public. If you call your local HUD office, HUD will give you a list of designated real estate brokers in your area who will help you inspect properties and, if you wish, prepare bids for submission to HUD. Sealed bids are accepted by mail; a 10% down payment is required. HUD will pay the broker's fees. A similar situation occurs when Veterans Administration (VA) loans go into default. The VA sells the homes via sealed bids, requiring a 10% down payment. You may be able to buy directly from the VA without using a broker. Call your state's VA office for their monthly listing. Here's a tip: Call early in the month, because that's when the lists become available. Finally, there's the S&L bailout to mine. As you certainly know, many S&Ls have failed. The "bailout" you keep reading about is not of the institutions or the stockholders, but of the insured depositors; they're the ones receiving federal money. The government, through the RTC, tries to recoup whatever it can by selling S&L assets, principally real estate. The RTC typically tries to sell its properties for a price approaching market value. All cash-deals are preferred, although in some cases the RTC will permit you to buy with as little as 15% down. Properties that are hard to move or have relatively low values, however, are sold through public auctions. The Resolution Trust Corporation, set up by the government to liquidate assets of failed savings and loan associations, still has a lot of property for sale. Today the RTC is making it easier than ever for individuals and small investor groups to purchase assets. It's called the Small Investors Program. And it's designed to provide the smaller investor better access to RTC offerings. They have a special toll-free number dedicated to small investors, so you can have instant access to information about auctions, sales events and seminars, financing, and opportunities for minority- and woman- owned businesses. Call RTC at (800)421-2073, and find out about their Small Investors Program. Check your local police, sheriff, and property tax offices, as well as local offices of HUD, the VA, U.S. Bankruptcy Court, and the Farmers Home Administration. There are a slew of federal agencies that sell real estate acquired through foreclosure. Some have been mentioned above. Others include the following: * Federal Deposit Insurance Corporation (Regional Directors of Liquidation) Marquis One Building Suite 1400 245 Peachtree Center Ave. N. Atlanta GA 30303 405 525-0308 30 S. Wacker Drive 32nd Floor Chicago IL 60606 312 207-0200 1910 Pacific Avenue Suite 1600 Dallas TX 75201 214 754-0098 2345 Grand Ave. Kansas City MO 64108 816 234-8000 452 Fifth Ave. 21st Floor New York NY 10018 212 704-1200 25 Ecker St. Suite 1900 San Francisco CA 94105 * Federal National Mortgage Association (Fannie Mae) Fannie Mae Properties P. O. Box 13165 Baltimore MD 20203 800 553-4636 3900 Wisconsin Ave. N.W. Washington DC 20016-2890 202 752-7000 510 Walnut St. Philadelphia PA 19016-3697 215 575-1400 950 Pace Ferry Rd. Suite 1800 Atlanta GA 30326-1161 404 365-6093 One South Wacker Drive Suite 3100 Chicago IL 60606-4667 312 368-6200 Two Galleria Tower 13455 Noel road Suite 600 Dallas TX 75240-5003 214 991-7771 135 N. Los Robles Suite 300 Pasadena CA 91101 818 568-5000 * Federal Home Loan Mortgage Corporation (Freddie Mac) 2231 Crystal Drive Suite 900 Arlington VA 2202 800 373-3343 2839 Pace Ferry Rd. Suite 700 Atlanta GA 30339-3718 404 438-3800 333 W. Wacker Drive Suite 3100 Chicago IL 60606-1287 312 407-7400 Four Forest Plaza Suite 700 12222 Merit Drive Dallas TX 75251 214 702-2000 15303 Ventura Blvd. Suite 200 Sherman Oaks CA 91403 818 905-0070 These agencies sell some properties by auction, some through local real estate brokers. Contact your local office for details. You can also call your local office of the Department of Housing and Urban Development, the Department of Veterans Affairs, or the Farmers Home Administration, all of which sell foreclosed real estate. Want to buy raw land from the federal government? The Bureau of Land Management frequently sells public lands. For information, contact the bureau of 350 S. Pickett St., Alexandria VA 22304; telephone 703 461- 1400. One excellent source for auction schedules and tips is Auction Opportunities Inc. Call 800 551-5161 for a sample copy of its newsletter. AOI recently reported that Resolution Trust Corp. is making a major attempt to unload the raw land in its inventory. Land valued at less than $500,000 can be auctioned without a minimum bid while land valued at up to $2 million can be auctioned for bids as low as 50% of appraised value. (Previously RTC demanded 85% of the appraised value in most land sales.) Total RTC holdings of raw land topped $7 billion, explaining RTC's rush to unload. Getting Real It's certainly no secret that this real estate market has been in a free fall ever since the overdevelopment of the 1980s was capped by the 1986 tax reform, which eradicated many real estate tax breaks. As a result, many lenders and loan guarantors now own properties that they'd rather not own. Auctions are increasingly favored by lenders and by government agencies as a way to move these properties. For example, look at a recent auction of Federal Home Mortgage Corporation or "Freddie Mac" properties. Over 500 homes were to be auctioned in six Northeastern states over a five-day period. Before the auctions, there were open-house weekends and "free" bidders seminars. As you can see, Freddie Mac is eager to unload its properties. The auction was "absolute," meaning no minimum bids were required. To sweeten the deal even more, favorable financing terms were offered: * If you were a first-time home buyer willing to occupy the house yourself, you could buy with only 5% down and get a fixed-rate mortgage at 8.133%. * Other homebuyers willing to live in the home or use it as a vacation home could also buy with only 5% down, but the effective mortgage rate was 8.635%. * Buyers seeking investment property had to put 5% down and pay an effective mortgage rate of 9.193%. If you'd like a free catalog of Freddie Mac properties and information about financing, call 800 466-1155. Crunching The Numbers As the ad mentioned illustrates, buying real estate is different for home buyers, second-home buyers and investors. If you're buying a home to live in, full- time, your primary concern should be, "Do I want to live there." Do you like the neighborhood, the schools. Is it safe, accessible to work, shops and recreational facilities? If you're comfortable with the area, don't buy until you've hired an engineer to inspect the property for structural defects. Unfortunately, real estate that goes into foreclosure often isn't well- maintained, and a house that isn't kept up regularly may present serious problems, not always obvious from a first glance. If a house passes all the tests, it's time to crunch the numbers. If you bid, say, $100,000, you owe a $5,000 down payment if the seller wants only 5% down. But then you have a $95,000 mortgage to carry. How much does that come out to be, before and after taxes, each month? How much are the other charges, such as taxes and insurance? You can decide how much you can afford to bid if you look at the monthly charges you'll incur, but you have to do some sophisticated calculations beforehand. Buying a vacation home is a bit more complicated. Again, you have to figure out if you really like the area and if you truly would spend weekends or summers there. You need to have a structural engineer inspect the property and you need to go through all the calculations, just as you would with a primary residence. A vacation home, though, is an investment too. Before you buy, you should try to learn if you'll be able to sell the property, if necessary. A heavy inventory of unsold houses in the area will make your house harder to sell. Ideally, you'll want to buy in a popular, growing region where real estate values are likely to appreciate over the years. You also may want to ask about seasonal rentals, if you decide to rent out your house rather than use it yourself. Houses near a beach or a ski slope, for example, often command high rents in season. If you're buying investment property, the math is all-important, whether it's a house, a condo, or a commercial property (e.g., shopping center, office building). Here, you need some assurance you'll be able to find tenants. Otherwise, you'll have all the expenses of property ownership with no income. Moreover, you'll need some idea of how much rent you can reasonably expect. Then you can compare your likely rental income with the amount of expenses you'll incur (mortgage interest, property taxes, maintenance, insurance) at various purchase prices. The trick is to buy at a price at which the expected income exceeds the expected expense -- what the pros call "positive cash flow." Some investors buy property even though cash flow is negative, figuring rents eventually will increase and the property will appreciate. That's a trap a lot of buyers fell into during the 1980s, which is why there are so many foreclosed properties on the market today. Buying investment property likely will turn out to be more time-consuming than you imagine. In return for your money and your effort, you should receive positive cash flow plus any appreciation. Before you bid at an auction, do your homework to figure out how much you can pay and still enjoy positive cash flow. Kicking The Bricks You shouldn't shop for real estate at auction without knowing some of the ground rules. Auction notices generally appear in newspapers, either as legal notices or in larger ads in the real estate section. If you see an ad for an appealing property, take a look at the property in person. Ask local real estate agents what comparable properties will sell for. Find out if the area has any social or environmental problems. Next, call the auction sponsor and ask for an appointment to inspect the interior of the property. Unless you know a lot about construction, hire an engineer to conduct the inspection. If you're buying new property from a developer, pay attention to any unfinished items and find out if the developer has a legal obligation to finish them. Naturally, you should consult with an attorney to see if there are any questions about the property's title. Giving Notice For real estate, cars, and other types of properties, how do you find out what's going to be auctioned? As mentioned above, government auctions are advertised in newspapers. In addition, auction notices frequently are located in post offices and city halls. Many government agencies have recorded phone messages, with details on upcoming auctions. These agencies also mail lists that notify subscribers of future sales.