Someone's Loss Was His Gain
The rash of foreclosures has caused misery for those forced out of their homes. But it's also provided opportunity for buyers like Ed Gilman looking for a deal.
Ed Gilman had little cash and hardly any time. Just enough for him to make the biggest financial decision of his life. He was ready to move up from his two-family house in Stow. So last year, on the slim hope that someone else's financial nightmare could become his dream home, the 37-year-old found himself at a home-foreclosure auction. "I had no idea what I was doing," he says. "There were five guys outside all dressed up, and there I was in jeans. I figured I'd show up for the experience. I didn't really plan on participating." Still, after being tipped off days before that a certain four-bedroom Colonial in Maynard would go to auction, Gilman came prepared with a $400,000 preapproved mortgage and $7,000 toward a down payment. He turned out to be the only serious buyer that spring morning. The lender was owed $465,000. Bidding opened at $360,000. The auctioneer looked toward Gilman, waiting for an offer. "I told him I needed more than three seconds to decide," Gilman recalls. But not much longer. The deal was too good to pass up. A minute later, he went from naive observer to buyer. The auctioneer proclaimed the property "sold to the man in the blue shirt" for $360,000.
Gilman, an art director who is single, now lives in the house, one of 7,653 Massachusetts properties seized by lenders in 2007 because their owners fell behind in mortgage payments, according to the Warren Group, which tracks New England real estate transactions. That was more than double the number of foreclosures in 2006. The increase was pegged to an incendiary mix: ballooning interest rates on adjustable subprime mortgages, declining prices, and fewer buyers. Homeowners found themselves making significantly higher monthly payments on properties that were now worth less than the loan balances.
While banks and mortgage companies are not especially keen on taking back properties, says Vincent Valvo, the Warren's Group's publisher, they also are not inclined to unload homes at fire-sale prices. Gilman's bargain - the Maynard house had listed for about $140,000 more than he paid - is not typical. "Foreclosure auctions are designed to protect the lender, not to let the property go at the lowest price possible," Valvo says. Most of the time, auctions don't attract any bids or high enough bids, so the bank or mortgage company holds on to the house but must eventually auction it again or market it conventionally. "The problem becomes when [the lenders] have a couple hundred properties. Sometimes it ends up being better to get them off the books at a lower value," he says. "But they're not willing to do it right away."
Lenders' reluctance to become property owners creates opportunities for shrewd investors, says Jeremy B. Shapiro, cofounder of ForeclosuresMass.com, which provides prospective buyers information about properties going into foreclosure. "The longer the lender has to hold on to the property after [an unsuccessful] auction, the more the lender has to pay out in carrying costs," Shapiro says. "That can include lost income from missed payments, legal fees, fees for the auctioneer, the cost of boarding up a property, and paying a broker to eventually sell it." He recommends that a prospective buyer work directly with the homeowner and lender before an auction. A bank might be willing to accept a reasonable offer to reduce its expenses. Advance negotiations, Shapiro says, may also allow for a home inspection and a pre-closing walk-through. Once an auction is underway, potential buyers can usually only walk the grounds and peek through windows.
In Gilman's case, a real estate agent was able to show him the house prior to the auction while the owner still had it listed for sale. But an auction purchase may hold surprises that a conventional deal does not - Gilman had to scramble to pay about $7,000 in back taxes and other overdue bills, as stipulated in the purchase agreement, to meet a three-week closing deadline. He also contended with the delinquent owner, who was not in a hurry to move out after Gilman got the deed. "I had to go over and be Mr. Friendly with someone who was not all that happy," Gilman says. Extremely unhappy, as it turned out. Seven weeks of delicate - often bristling - negotiations passed before Gilman was able to call the house his home. "I was expecting the place to be totally demolished, but it was in good shape," he says. "It was a miracle, although he did leave a ton of garbage behind."
For many, buying a house is stressful enough without piling on such added drama, but Gilman says he has no regrets. "I know so many people who go through life living in fear or in their own comfort zones," he says. "I'm the opposite of that. I used to dive off cliffs."
Mark Pothier is a senior assistant business editor at the Globe. E-mail him at mpothier@globe.com.
