Wednesday, July 07, 2004

Foreclosure Sales Offer Deals on High-End Homes

By JUNE FLETCHER

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.

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Island Park, Idaho $1.5 million

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.

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Atlanta $1.5 million

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.