Fine print on foreclosure sales

Buying from a bank or other lender adds complications, but diligence and patience can land you the home you want

The property near Porter Square in Somerville was nearly perfect for Dan and Diana Needleman. Dan Needleman is starting work as a professor of applied physics at Harvard in the fall, and both wanted to live in a neighborhood that was walking distance to amenities.

The single-family house was situated on a more than 7,000-square-foot lot - a large parcel for Somerville. Inside, the house was loaded with recent upgrades: a professional kitchen featuring two ovens and a six-burner stove, stylish recessed lighting throughout, and a fully finished basement. They made an offer within a day.

Trouble was, the seller was not the usual homeowner. It was the mortgage company that had foreclosed on the prior owner and was now selling the property. The house had a bramble of paperwork that needed untangling, the closing was delayed, and the Needlemans had to move into temporary quarters during the interim.

"I guess my biggest piece of advice would be to be prepared to move fast and don't get too emotionally attached," Dan Needleman said. "There were lots of ups and downs."

Buying a house in foreclosure, or via a short sale, is not for the faint of heart. The process is loaded with obstacles; negotiations can take forever, even though the lenders in charge may have set tight selling deadlines. The legal process around the sale of a foreclosed home is more complicated, involving more homework, more paperwork, and more diligence. The property may have a number of liens on it - for overdue taxes, for example - that need to be cleared; other creditors of the former owner may have made claims that need to be dealt with.

Those issues have only been compounded in recent months, as more and more foreclosed properties filter into the market and an already jammed court system. In some cases, the added legal issues can add six months to the closing time. Meanwhile, some lenders are not able to officially take title to a home for weeks or months after the foreclosure because of bottlenecks in Land Court.

Dick Kempinski, a Coldwell Banker agent in Sturbridge who is the seller's agent for several lenders on foreclosed properties, said he had one deal that took two years to close because of a forged deed. Even straightforward foreclosures can linger for weeks or months.

"Right now there are so many foreclosures that the attorneys' offices can't keep up with all of the work," he said. "You have all these processes you need to go through with the courts, and you just don't have that in a conventional sale."

Some types of transactions have become so laden with issues that Redfin, an online residential real estate brokerage, has established criteria for flagging sales for potential trouble. Boston Redfin broker Alex Coon said any listing that has a clause giving buyers 48 hours to decide on the lender's offer is particularly troubling.

"The banks take a really long time to make a decision because they're waiting for other offers," he said. "Then all of the sudden you get the sales agreement - which you can't ratify - and you have to decide within a day whether you want to go ahead with the purchase."

Coon said Redfin is also avoiding short sales where there is more than one lender holding mortgages on the property, as the holder of the second mortgage often stands to lose the most and will try to upend a sale. A short sale is when the homeowner tries to sell the home for less than he owes on the loans, and then attempts to get the lender or lenders forgive the unpaid amounts.

For foreclosures and auctions, Coon recommends first-time buyers attend a few auctions to see how the process works before bidding or making an offer on a home.

"There are bargains to be had if you're the right person with the right set of circumstances and you know how the process works," he said. "This isn't a new phenomenon, but it is a much newer phenomenon on this sort of scale."

In addition to the legal glitches, banks don't typically make counteroffers or haggle as much as a seller in a conventional sale might. Additionally, foreclosed properties are sold as is. Buyers can conduct home inspections but cannot use them as a negotiating tool.

Coon has seen houses sold with all of the copper plumbing and, in some cases, wiring removed. Kempinski says the delays can lead to deterioration of a home, including frozen pipes. Previous owners who are facing foreclosure often take their frustration out on the home, Kempinski said; he recently paid $7,000 to rent seven dumpsters to haul away trash from a foreclosed home.

"Some people blame the banks," said Kempinski, who has handled foreclosed homes for 16 years. "But it's not the banks' fault" the homeowner didn't pay the mortgage.

Lenders say there are often good reasons why the process can, at one point, take so long, and yet at another, move at high speed. Patrick Carey, who heads default and retentions operations for Wells Fargo's home mortgage unit, said a tight deadline on decisions is attributable to the lenders' goal of moving properties off their books as quickly as possible. On the other hand, he said, lengthy delays are often a result of low-balling by buyers who think lenders are desperate to be rid of the properties.

"In our experience, we see consumers who expect to make a killing on a property, so they come in with an offer that is very low," Carey said. "If we don't counteroffer, it usually means we have an offer, or several offers, that are more in line with reality."

For those who persevere, such as the Needlemans, the result can be a terrific value. When they first made an offer, the lender said it had received a higher offer. Days later the lender call back to say the other bidder had backed out. Suddenly the Needlemans had just 48 hours to review and sign a purchase agreement.

"We had to get the home inspection quickly," Diana Needleman said.

The house needed a new boiler and the front stoop had structural damage. There were also a number of liens on the house, and it took additional time to contact the right people to settle them. Another curve ball: the previous owner had settled a lawsuit with a neighbor that called for the neighbor to receive $20,000 at the sale of the home, Diana Needleman said, which the lender had to make good on.

The additional paperwork delayed their scheduled closing by two weeks. By then, the Needlemans had to move out of their apartment, so they took a sublet and stowed their possessions.

With the stress and anxiety behind them, Diana Needleman said the process worked out well in the end.

"It's an amazing house," said Diana Needleman, who is now looking forward to redoing the large backyard. "We are very, very happy."