Home Buying in San Francisco>Question Details

Cyndi K-l, Home Buyer in California

Risks of Buying a Foreclosed apt/condo in San Francisco?

Asked by Cyndi K-l, California Thu May 1, 2008

Hello, I'm a 23 yr old,about to get my MBA and hopefully get a job in San Francisco. I've always wanted to own property, and have been saving money for my downpayment as well as building my credit. I don't think it's too early to start saving. I have accumulated $5,000 (in less than 1 yr) so far but by the time I'm done with school (25 yrs old)and get my first job I'll have about $20K saved for this purpose. I'd rather buy a foreclosed home (in a fairly safe area) because of the affordability factor, but I'm not very knowlegeable about the risks involved.. Thanks!

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I'd personally steer clear of BMR's. There is no guarantee of appreciation even if the rest of the market appreciates as it's tied to median income gains. For more on BMR's try http://www.sfgov.org/site/moh_page.asp?id=48083

BMR's are also sold via lottery because there tends to be far more buyers than inventory, and you are not allowed to pay more than the asking price, so everyone submits almost identical bids, and one lucky bidder wins the "lottery". If you find 19 other buyers on each BMR you submit on, you have a 1 in 20 chance of winning, so it may take 20+ offers before you get one.

If you can only afford $300,000 you're going to want to buy outside of San Francisco, otherwise you'll be looking for "fixer" studios in the least desirable areas of the city. You may find something you'll like more in Oakland, and you will find many options within a 45 minute commute to the city in that price range. But in the city $300,000 is a virtually non-existent price range.

Personally, if you must live in San Francisco, I'd suggest buying an investment property outside of the city, and find the cheapest rental you can. Alternatively, you'll need to get an "investment" partner to buy something in a higher price range here in the city. A parent or relative maybe? Even up to $500,000 your options are quite limited in San Francisco (the city). Find a roomate, pay $1000 per month, and buy an REO (bank owned foreclsosure) in Santa Rosa and put a renter into it (just one scenario). As to risks of foreclosures... the advice below has been good... all purchases are similar to all other home purchases, except that you need to be especially diligent during your inspections of the property. The bank will disclose next to nothing, so you have to do all of the investigating of problems yourself. So working with an experience Realtor, property inspector, and title company will be important.
Web Reference: http://www.SFisHome.com
0 votes Thank Flag Link Mon May 5, 2008
Here is the reality of it all:

1. Even if you have excellent credit, you still need money to buy whether it is bank-owned or foreclosed. Foreclosed will be tougher to buy because you need more cash and financing is not available unless you pay double digit interest rates. Financing is available for auction properties and bank-owned, but you still need to qualify. $5000 is not enough to do anything except cover half of your closing costs. $20,000 is a good start but not enough.

2. You need a job to qualify for a loan. At least 2 years of steady employment or if studying, you must have been in the same field. Lending guidelines have become extremely tough. Maybe if you try FHA, you might have a better chance.

3. No foreclosure properties in SF that will be in the range that would be manageable unless you buy with partners or go through special programs.

4. Below market properties is a good way to go -- guidelines are different; income will be a factor and homeownership knowledge is also important. It's true that you would not benefit from property appreciation because they are intended to be kept as BMR properties for others so the program could continue to help others.

It's great that you are open to advice.
0 votes Thank Flag Link Fri May 2, 2008
Thanks Don! I'll take that into consideration. I really appreciate your advice about Deeds and past Condo fees owed. I definitely don't want to be negligent when purchasing my first home. Due Diligence is key!

- How expensive can Closing costs and Inspection costs get (i.e. if I'm buying a $300 K condo)?
- In which circumstance do you ask the sellers to cover the closing costs?

- I recently found out about "Below Market Value" homes from the Mayor's office. So, correct me if I'm wrong but when buying a property of the sort, and remodeling it, the value of the property could appreciate but if you wanted to sell it you couldn't do so at the appreciated price? So, If I bought a 1bed-1 bath subsidized condo for $190,000 in SF, lived in it for 2-5 yrs, and then moved out. Who would I sell it back to, and for how much?
0 votes Thank Flag Link Thu May 1, 2008
Rebecca, Thanks for your help. I'll make sure to revise my budget (saving about $40K instead), work on building my credit, and keeping my options open (i.e. buying in a city nearby or a short sale). As a (future) first time buyer, I wouldn't want to go over $300K when purchasing my first property (= $30K down based on a 10% requirement-I could definitely do that). I'd feel more comfortable having to live with this kind of financial obligation for 15 or 30 yrs. It's somewhat bizare to know that you could get so much more with that when buying in the Mid-west or the south, but I don't plan to start a family until I'm truly established (mid 30's & life over there seems to be perfect for just that) and besides I travel a lot, and in my opinion San Francisco is the most beautiful city in the country or I should say it's the only place that I could call my home. If I plan my life well, and do well professionally, then I'd like to buy a small place/apt in Hawaii next.

I really appreciate any good advice from knowledgeable people, so thanks for your feedback! I'm truly excited about my future and I have what it takes to make it.
0 votes Thank Flag Link Thu May 1, 2008
Wow, you have a lot of variables and options to consider. First of all, $20,000 is 5% down on a $400,000 property--not including closing costs. Some lenders are requiring 10% down these days or you could go FHA. (Meaning you might need a little more money or ask the seller/bank to pay closing costs.)

As far as San Francisco goes, there are very few foreclosures currently. That could change in 2 years. Still, it will be difficult to find something

The least expensive REOs (foreclosed properties) currently available are a single-family home in the Bayview for $384,000 and a condo in Ingleside Heights for $361,000.

Your logic is good as a recent Wall Street Journal article stated: "Short sales -- which were rare when the housing market was booming --can also be a good way for lenders and investors to minimize losses. They typically result in losses of 19% of the loan amount, compared with an average loss of 40% for homes that are sold after foreclosure, according to a recent analysis by Clayton Holdings Inc.,..." (Why Lenders Are Leery Of Short Sales By Ruth Simon and James R. Hagerty, The Wall Street Journal Last update: 11:50 a.m. EDT April 17, 2008)

However, most of this does NOT apply to San Francisco. Overall, our real estate market and economy are strong. Don't believe all the doom and gloom that you hear. We are immune to most of that.

A few other options to consider: a TIC is generally more affordable but also requires a higher down payment (generally 20-25%) plus 6 months' of reserves in assets. And there are some other areas close to San Francisco that are very affordable. For example, I sold a friend of mine a lovely condo in Marina Bay, a gated community with amenities near historic Point Richmond, 20 miles away. One similar to his (2BR, 2 bath, and 1000 square feet) was on the market recently for only $300,000 as a short sale (previous price around $450,000).

Many people buy in the East Bay as an affordable stepping stone to San Francisco.

That said, buying a foreclosure is not risky compared to buying at the court house steps where one buys sight unseen and may not be aware of all the liens. After the bank has foreclosed, they take care of any liens so that you get a clear title. Other than taking forever to get a response and risk being bumped out by a better offer, it merely requires more patience, good credit and sense of adventure! :)

P.S. It’s commendable that you are starting to investigate your options well in advance so that you can make an informed choice when your timing is right.
0 votes Thank Flag Link Thu May 1, 2008
Regarding purchasing a foreclosed home, some are relative bargains; others are not. Don't restrict your search just to REOs.

The risks involved include most of those involved in buying any property: Is it a good value? Can you afford it? Does it suit your needs?

But, yes, I understand what I think you're asking: Any special risks of buying a foreclosed property? Some. The main one really is the uncertainty of the process. In a property that's been foreclosed upon, the lender now owns it. Banks haven't proven themselves especially adept at selling property they own. That's not their strong suit. So the process can drag on for quite a while. It can seem illogical at times. But, if you're patient and you have a Realtor with experience, it can work out OK.

Another risk, not significantly different from buying any property, is the property's condition. When buying an REO, you're buying it in "as is" condition. So, as with any purchase, you should have a home inspection. But rather than being able to request that certain repairs be made, you must adjust your offer to reflect any needed repairs.

As I understand it (and I'm not a lawyer), you usually receive a special warranty deed, rather than a general warranty deed. That means the bank is saying that they didn't do anything while they held the deed to compromise the deed. However, unlike a general warranty deed, the bank is not taking responsibility for anything that may have occurred with the deed prior to their receiving it. Make sure you check with a lawyer to understand what that may mean.

Also, you may find condo associations trying to pursue you for past condo fees owed. Again, check with a lawyer. The owed condo fees should have been wiped out as ownership passed to you. However, I've heard of cases where that doesn't appear to have occurred. And even when it has, sometimes the condo association tries to collect past fees, anyway, even if they don't have a legal right to do so.

Those are a few of the possible risks. They're not deal-killers, just something you need to be aware of. But, as I said earlier, don't restrict your search to just foreclosed properties. There are some very good "conventional" deals out there, too.

Good luck.
0 votes Thank Flag Link Thu May 1, 2008
Don Tepper, Real Estate Pro in Burke, VA
MVP'08
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