Good buy or goodbye? Tips to shopping for foreclosed, short-sale and flipped homes

by Peter Corbett The Arizona Republic Apr. 23, 2010 08:05 AM

It has a mountain out back and, apparently, a mountain of debt.

Weeds and overgrown landscaping obscure a for-sale sign in the front of the foreclosed home northwest of Deer Valley and Cave Creek roads in north Phoenix.

"This one is not too bad," real-estate agent Gary Holloway of Zip Realty said of the long-vacant home. "They get no love."

The four-bedroom house, built in 2006 by Courtland Homes, is missing a dishwasher, refrigerator and built-in microwave oven. It also has some quarter-size holes in the kitchen wall. Otherwise, it appears to be in reasonably good condition.

The foreclosed home in the Eagle Bluff subdivision needs appliances, new carpeting and paint at a cost of at least $15,000. The two-story 3,182-square-foot home has a good view of one of the unnamed Union Hills beyond the back wall.

And it could be a good buy for a cautious buyer who knows what to look for in a foreclosure.

Listed at $210,000, the home was in escrow and could become yet another of the thousands of foreclosed Valley homes that buyers have acquired from banks.

Arizona had 21,442 foreclosed homes in the first quarter of this year, according to RealtyTrac.

The state has the nation's second-highest foreclosure rate behind Nevada, with one in every 49 homes with a mortgage receiving a foreclosure filing in the first quarter, according to RealtyTrac. That's triple the U.S. average.

Just fewer than half of Phoenix's 5,183 home sales in the first quarter were foreclosures, Zip Realty reported.

Buyers of foreclosed homes can save tens of thousands of dollars on the purchase price. But real-estate agents warn of pitfalls.

Jeff Barker of Diamondback Realty in Scottsdale said buyers must rely on a home inspection to protect themselves when buying a foreclosed home.

No disclosure of missing appliances or damage is required at the trustee sale of a foreclosed property.

"You've got to do your due diligence," he said. "And hire a good real-estate agent."

Buyers often make a big mistake in underestimating the cost to remodel a foreclosed home, said Barker, who has listed about 75 homes for banks.

Learn home market

Ron Bernier, a broker with Zip Realty, said buyers can better understand the market value of a property by driving past it and seeing conditions in the neighborhood.

Buyers can expect to be bidding against others for foreclosed homes in the lower price ranges. Plus, deals often fall apart when a property does not appraise at a high enough price to satisfy the new lender.

Holloway of Zip Realty said buyers might also consider buying a previously foreclosed home that an investor already has remodeled, what's known as a fix-and-flip property.

The traditional resale market is struggling to compete on price with the distressed properties and fix-and-flip homes, he said.

To reveal market options, Holloway visited the Eagle Bluff neighborhood to show the foreclosed home mentioned earlier, as well as a similar short-sale home and fix-and-flip home.

Deal or no deal

The short-sale home, slightly smaller than the other two, was listed at $240,000.

It was in better shape than the foreclosed home, with nice cabinets and light fixtures in an upstairs office. But simulated-wood flooring had been poorly installed, and most buyers would likely choose to repaint the home's neon-colored bedrooms.

Holloway also warned that a short-sale price is not "real" until a bank accepts an offer from several bidders.

"Don't fall in love with it, because it's not real until you own it," he said of a short-sale home.

The same goes for foreclosed properties. Holloway advises clients to keep looking because distressed-property deals often take a long time to complete and can fall apart completely.

Home shows well

The fix-and-flip home he showed was nicely staged.

"Investors know the drill," Holloway said. "It's like a model home. They even installed a new doorbell and coach light at the front door."

Inside, new granite countertops, back splash and cabinets had been installed, along with new tile, carpeting and kitchen appliances. It comes with a home warranty.

The house listed at $270,000, but the investor had agreed to a price of $265,000 before a buyer got cold feet.

At $265,000, the investor stands to make about $15,000 in profit, Holloway said. The previously foreclosed home sold for $195,000 and the investor spent about $35,000 on remodeling it. The investor also will spend about $20,000 to market the home and pay closing costs and commissions.

The extra cost of the fix-and-flip over the foreclosed property might be a better deal for someone wanting a home that's move-in ready.

However, Barker of Diamondback Realty warned that buyers should be careful with fix-and-flip homes because sometimes the remodeling is cosmetic, with cheap carpet, paint and generic appliances.

Good buy or goodbye? Tips to shopping for foreclosed, short-sale and flipped homes