Foreclosure: Tips and Advice for Buying (or Walking Away from) a Foreclosed House

Going in, we knew one thing for sure: We weren’t buying a foreclosure. Too risky. Too messy. And the idea of capitalizing on somebody else’s misfortune, or indeed making good on some callous stranger’s financial excess, was pungently unappealing to us.
My wife Steph and I are in our late 20s. We’re responsible and have made solid starts in our respective careers — she’s a social worker, I’m a writer — so we figured the time had come to buy a house. That black hole that has swallowed up our rent checks for the last decade would have to make do without our offerings. We’d invest in bricks and mortar.

We’ve lived in London, Brussels, Washington, D.C., and Westchester; but we’ve always liked the Hudson Valley. Steph grew up in Newburgh, and her family still lives there. When she took a job in Poughkeepsie, it was settled: We’d move to Beacon. It was commutable; sufficiently city without being expensive or overwhelming; had the requisite coffee shops for us to pretend we’re not hipsters in; and walkable enough for my European sensibilities.

Picking Beacon was the easy part; finding a house there proved much harder. Beacon had no houses for sale — none. Well, that is to say, there were small ones and shoddy ones and badly situated ones and very dated ones and ones in bad neighborhoods and plain weird ones. But nothing that was right for us. We sort of settled on something that was almost there, but I dragged my feet and somebody beat us to it. Then we got serious about a place in the Spackenkill region of Poughkeepsie. Great neighborhood, great school district, great potential, but nothing to do for a couple with no kids.

At length, we spotted something on the Web site Zillow. We’re not sure who saw it first — maybe it was Steph, maybe her mother — but it doesn’t matter. We were in love before we’d even seen it.

And when we walked three steps into it, we loved it even more. So striking was this house, so majestic and well-appointed and historic. It had a view of the river. That had been the dream: I could make my home office in one of the rooms that looked out on the water; I could procrastinate so much better there. And it was just three blocks down the hill from her folks. I thought about commissioning a feasibility study to see if we could affix a zipline from their kitchen to ours; my mother-in-law could shoot leftovers of that succulent roast of hers down the line and through our kitchen window, which would land on a dedicated carving station with a soft bounce.

But… It was a foreclosure. In Newburgh.

I’d sworn I’d never live in Newburgh — you know, the murder capital of New York. I’d always been enchanted and scared of it in equal measure. My work has taken me to some of the most destitute places on earth and I was never uncomfortable; but truth be told, Newburgh always gave me the creeps. A lot of people living in its inner city have nothing to lose, and that scares me. But its infrastructure is magnificent: the Victorians, the colonials, the brick mansions and brownstones, the churches, even the factories and riverside warehouses. The place holds an irrepressible promise of a future as grand as its past, when titans of industry lived in those houses. Whether that past will also be its future we don’t know for sure. Newburgh might be a town of only yesterdays and tomorrows.

Whatever — that was the house, and that was the view. It felt like ours before we’d so much as put in an offer. And if it was in Newburgh, we placated ourselves by anointing it Balmville, the more soothingly named enclave in the northern section of town, far away from the sketchier parts.

We had other reservations to overcome. Two of the bedrooms had clearly belonged to young children. Stickers of flowers and Winnie the Pooh dotted the walls. Imagining the fate of this foreclosed-upon family made us feel terrible — until we did some sleuthing on Facebook. It seemed like — or we chose to believe — the previous owner had tried to sell the place, given up, abandoned it, and then somehow bought another, much bigger place. How exactly he did this we don’t know. But we’re pretty sure his kids have much nicer rooms now.

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It was time to make an offer. Buying a house from a bank has a big advantage, we learned. We could low-ball without repercussions. So we went in at $185,000 on a list price of $235,000. If you buy a house from real people, they might be insulted by such an offer and refuse to entertain another bid. Banks don’t care. They just see the figure. But that means they’re immune to emotional pleas as well. In all, we went back and forth 11 times in the span of about three weeks. Towards the end, the notes we appended to our bids saying that we were getting close to our ceiling, or that we were strong buyers who wanted to make a nice home for ourselves, fell on deaf ears. Even our “best-and-final offer” was answered with yet another counteroffer. Our wise realtor Jan Kaplan of Prudential Serls Prime Properties — who is lovely and patient and honest and knowledgeable and everything she stereotypically wasn’t supposed to be — recommended we hold firm. So we did. And the second time around the bank accepted our best-and-final offer of $210,000 with a $10,000 seller’s concession (a credit that helps pay for closing costs by sticking the amount on the back end of your mortgage, rather than making you pay it up-front).

From then on, everything was rushed. We came to an agreement towards the end of the day and were told we needed to find a lawyer by the next morning so that Fannie Mae, which owned the home, could send the paperwork. Weirdly, Fannie Mae both owned the house and underwrote the loans for our local credit union; essentially, this federally sponsored corporation would get paid for the house with its own money. We figured this would simplify things. We figured wrongly. Fannie Mae on the sell side agreed to the $10,000 concession. But Fannie Mae on the buy side nixed the idea, since closing costs weren’t going to be that high. Somehow, we became the go-between for different departments of the same company. So, after consulting with both Fannie Mae and Fannie Mae, we settled on a straight-up $200,000 sale with no money back.

They’d come down 35 grand and we’d gone up 15. We had set a cap and hadn’t gone over it. The prospect of owning a largely unknown quantity scared us enough; we weren’t going to overpay for it as well. Because a foreclosure is, to a large extent, a blank slate. The history of this 85-year-old house had been completely erased when the previous owner walked out. We didn’t know what its secrets were, what it had been through, where it had bled or wept or broken down. A surveyor had to tell us where the lot started and ended, exactly. And we knew we’d have to spend money on stupid little things you wouldn’t need to bother with in a regular house sale, like replacing the missing remote to the garage door; getting the alarm system reset because we wouldn’t have the codes; and bringing someone in to see how functional the water heating, forced air, and air-conditioning systems were. And that was all before we’d even done an inspection. We got an unusually tight five days to do our due diligence — two of which were over a weekend, and a third was a national holiday.

Thankfully, the house was in decent shape, especially for a foreclosure. The marble-like stone on the outside was indestructible, and the original slate roof shingles only needed minor repairs. But the inspector thought the wrapping on the HVAC ducts in the basement might contain asbestos. He figured we could encapsulate it for about $600. It tested positive and since it was friable, an expert recommended that we have it removed, along with the ducts whose joints it was insulating. It was visibly brittle, and scraping it from the ducts could release particles into the air vents. The removal of the ducts was quoted at $3,150. Replacing them would be $4,500, plus $850 for air testing. That’s how a $600 fix turned into an $8,500 job. The bank agreed to knock $2,500 off the purchase price.

That wasn’t all, of course. Some knob-and-tube wiring had to come out. The upstairs and basement bathrooms were badly dated, the ground floor lacked a powder room, and the gutters were either broken or missing. We had no idea what kind of shape the appliances or cooling and heating systems were in. And that’s to say nothing of the yard. But then again, we were getting the place for less than half of the $393,000 it had been worth before the housing bubble popped.

We went into contract. They made very clear that we were purchasing the house “as is.” We’d buy it, and then we’d be on our own. Whatever issues might turn up afterwards were on us, there would be no legal recourse whatsoever. Fair enough.

The next step was securing a mortgage and home insurance. The former was straightforward; the latter not. We learned that most insurance companies won’t cover a house that’s sitting vacant. We explained that we’d be moving in within two months of closing, once we’d finished repairs and remodeling. But it was no use. Just one company would cover us, at a higher premium.

We cleared that hurdle, but the next one would trip us up.

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A week before the scheduled closing, we got word that Fannie Mae had never bothered to get the deed changed into its name after foreclosing on the house. And since deeds are kind of a big deal in home sales — you know, needing to own what you sell and all — that pushed everything back. This sort of sloppiness is apparently very common in foreclosure sales. Fannie Mae asked to extend the contract by a month to straighten things out. But like they had throughout, they stalled on getting us the paperwork, aggravating our already fraying nerves. Paranoia set in. Were they trying to back out? Had a developer or some other family come along and made a better offer? Our lawyer Joe Rones, who is a mensch, and his diligent paralegal Becca Shaw reassured us. But we were uncomfortable in the knowledge that our contract could run out without a sale.

Eventually the extension materialized, just two days before the contract was to run out, before we were supposed to close. This brought us to the unpleasant task of calling all the contractors we’d lined up to tell them we had no work for them the next week, and ask if they would please come back some other time, even though we couldn’t tell them when. A fairly tight three-month window between closing and the end of our lease on our apartment was shrinking with every passing day. But the stress, we figured, was the price of the bargain.

The tension never let up. The quiet persisted. We’d already decorated the house in our minds. Picked out toilets and tubs and tiles and paints. We were placing imaginary furniture and matching it up with imaginary rugs. But for weeks on end we heard nothing from the seller’s side. Our realtor and lawyer pushed hard for word on the deed, for a new closing date, for anything. But they were met with silence. Now that it was time for them to deliver, after all the hoops had been jumped through, all of Fannie Mae’s urgency had dissipated. 

After a few weeks of heavy snowfall, we went to take a look at how the place was weathering the winter. A puddle of water sat on the floor of the dining room, directly below the rooftop terrace in the back of the house, where the snow had accumulated. Without proper gutters and sufficient slope on the roof, the water sat and eventually made its way through the roof and wall. The plaster on the ceiling was crumbling, the siding peeling and falling away. Sitting empty and unloved, the house was beginning to rot.

We brought our contractor back and he discovered that the roof on the extension — which was made of asphalt, not slate — wasn’t laid with the requisite rubber liner below it. Nor, for that matter, was the roof intended to be used as a deck, with the joists too far apart to support the weight. (In retrospect, it had always felt a bit bouncy up there.) To fix the roof would be another $7,000 — on top of the $8,500 for the asbestos; and the $25,000 or so it would take to fix the existing bathrooms, electrical wiring, slate roof and gutters, and to add a powder room and some badly needed closet space. And that’s before we’d do anything about the cheap kitchen and its own structural issues, finish the hopeless stretch of basement that led to the fourth bedroom, or put in the $3,000-odd share we were told our new neighbors expected us to contribute for the repaving of the private road that acted as a common driveway for the cluster of houses behind ours.

But confronted with our request that the purchase price be dropped another $7,000 and that the closing not be delayed further, Fannie Mae answered… nothing. They never said a word. Total radio silence. The only person who would offer any kind of response was the selling broker’s administrative assistant, who acted like a bully, forever threatening to put the house back on the market if we didn’t drop our growing list of demands, born of their own sloth. Even our seasoned lawyer and realtor — who’d more or less seen it all — were taken aback and grew increasingly concerned that the deal would never get done. We called the county clerk several times, and no request to change a deed was ever filed.

After paranoia came insomnia. The days ticked by in silence. Everybody we talked to advised us to walk away. We’d gotten mired in a bad, one-sided relationship. Our partner in it was elusive, and possibly unattainable. This union, if it ever came to that, was going to strain our psyche — and possibly our marriage — for at least a decade. There was that much to do. We gave Fannie Mae an ultimatum. We demanded that the $7,000 be taken off the purchase price and that we’d close in time. No answer. So we steeled ourselves and broke up with our dream house. We walked away crushed, taking $5,000 in losses. The appraisal; the rate lock; the architect; the de- and re-winterizing for the inspection; the inspector; the asbestos inspector; the survey; the title search. They had all added up.

We’d been right about foreclosures all along.

“This was a fairly unusual situation,” says Kaplan, who has worked in real estate for 22 years. “But it does happen. I’ve heard other horror stories where there is no signed deed at the closing. Basically, the bank just doesn’t care; there is no human emotion involved here. They don’t care if your lease is up, if you have to transfer money, if your inspection is bad. The banks are very short-staffed, and things fall through the cracks.”

So what advice does Kaplan give to those who have fallen in love with a foreclosed property? “You have to know what you are getting into; things are usually in worse condition than they appear to be. It doesn’t mean you can’t get a good deal on a great house; but if you want a quick closing, don’t go with a distressed property.”

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A few months on, we haven’t bought anything else. At the time of writing, we were in contract for another house — a regular sale this time — but that got complicated by an owner’s bad debt, too. Such is life in post-housing market-crash real estate. Either way, we’ll have our home yet. And every now and then, we’ll drive by that foreclosed dream house, and wonder what might have been. And what toll it would have exacted on us.

The Foreclosure File

The numbers

• At press time, there were almost 1.4 million American housing units in foreclosure nationwide, while close to 900,000 homes were for sale.
• The State of New York counts about 70,000 homes in foreclosure.

• Putnam and Orange counties are among the five counties with the highest foreclosure rates in the state.
• Nationally, 148,054 foreclosure filings were registered in May — one in 885 American homes — down 28 percent from last year.
• The price of a foreclosure is typically $50,000 less than the overall average house sale price.

Source: www.realtytrac.com

The procedure

• The typical foreclosure in New York takes 120 days.
• The State of New York allows both judicial and non-judicial foreclosures. This means that even if a mortgage doesn’t include a clause allowing the lender to sell off the property, if the borrower is in default on their payments, a judge can grant that right regardless.
• Unlike most states, New York doesn’t have a right of redemption: The former owner can’t reclaim the property by coming up with the money after it has been foreclosed.
• In judicial foreclosures, New York judges can impose a deficiency judgment — the judge can make the borrower liable for any remaining debt on their mortgage not covered by the foreclosure sale.

The advice

• Make sure the house is worth the extra hassle. Decide how badly you want it and ensure you are getting it at a below-market rate.
• Don’t rush. If you’re under the gun to find a new place to live, a foreclosure is probably not for you. The process can drag on much longer than you anticipated.
• Invest in a good lawyer. Dealing with a bank is tricky. Get someone who is swift and tough like a ninja — only with a law degree instead of nunchucks.
• Inspect, inspect, inspect. Nobody is under any obligation, legal or moral, to fully disclose everything that’s wrong with the house. Try to uncover as many issues as you can. Bring in specialists, and get contractors to price out the repairs. Add them all up and see if the house is still such a steal.
• Leave yourself a large contingency. Whoever owned the house before you probably knew they were going to lose it, stopped putting money into it, or even purposely damaged it out of spite. In all likelihood, that’s money you’ll have to smash up some poor, innocent piggybank to get.
• Have an exit strategy. Things go wrong, and houses are seldom what they seem. Leave yourself with an out, so that when the math no longer makes sense, you can walk away.