Fight blight: Invest in bank- owned properties

Photos provided by Kathi Jones-Cutler This is one of the distressed homes that Kathi Jones-Culter and her husband, Scott Culter, have renovated recently. Before, the living room was drab and outdated, with an unsightly drop ceiling, unattractive tile and a lackluster fireplace.

After the renovation, the room is much cleaner and brighter looking, with new neutral paint and carpeting, recessed lighting and an attractive new fireplace surround.

Opportunities ripe

for savvy investors

With empty houses in seemingly every neighborhood across metro Detroit, bargains abound — making it an ideal time to invest in a distressed property.

After doing a bit of homework, researching the options available — short sales, foreclosures, the less common deed in lieu of foreclosures, and auctions — and enlisting professional help, all it takes is some gumption and seed money, or a good enough credit score, among other requirements, to apply for financing.

Many lenders will not finance a home that is in disrepair, said Jeff Marsack, a loan officer with Great Lakes Mortgage Funding in Sterling Heights, so in many cases, would-be investors will need to either seek Federal Housing Administration financing or have cash on hand to purchase the property.

“Right now, the minimum credit score is 620, which is still pretty liberal, and for the down payment, they’ll need to put down 3.5 percent of the sales price of the home plus the cost of repairs. … The interest rate could be higher (than a traditional mortgage) but just a touch; it’s at about 5.25 to 5.5 percent,” said Marsack of FHA loan terms that include a Department of Housing and Urban Development 203(k) loan to make repairs.

The 203(k) loans — the Streamlined Limited Repair Program is for repairs that total under $35,000, and the Full 203(k) for repairs exceeding $35,000 — do have some restrictions: They’re for primary residences only and can not be used for investment properties; and the work, which must be done by licensed professionals, must be completed and inspected within six months of closing.

Short sales in short

A short sale is a home that’s still occupied by the owner and is sold for less than current market value, contingent on lender approval; deed in lieu of foreclosures, in which the lender allows a homeowner who is in pre-foreclosure to voluntarily give the house up and turn the deed over to the lender, tend to fall in this category.

These homes are typically in much better condition than their foreclosure counterparts; however, the purchasing process can be very lengthy, and the purchase agreement could fall through in the end.

“Buying a short sale can be a very lengthy process … because even if you make an offer, it still needs bank approval,” said Realtor Kathi Jones-Cutler of Max Brook Realtors in Birmingham, noting that bank approvals are starting to take less time, about six months now compared to a year or so in the past. “While it could take awhile, and the offer could definitely be rejected, it’s just like a regular sale: You’ll receive a full disclosure (a list of any problems with the home) and you can get an inspection. … Buying a short sale can be a really great opportunity, but you have to be very patient.”

As for financing, Marsack said, it is typically the same as applying for a conventional mortgage.

Finding foreclosures

Investing in a foreclosure could either be very lucrative or very risky and takes a bit more research — and work — than purchasing a short sale, as foreclosures tend to be in terrible shape.

“Oftentimes, they’re vacant and stripped, and by stripped, I mean I have walked into properties with cupboards, toilets and sinks missing, copper wires and furnaces ripped out — you’ve really got to know what you’re doing and be prepared to handle anything,” said Cutler-Jones, adding that the home could also harbor hazardous materials, such as asbestos, or dangerous mold.

“I definitely recommend getting a full private inspection because these homes are sold as-is, so it’s imperative to get a professional to look over the home top to bottom,” said Marsack of both real estate-owned and HUD-owned properties.

“A huge thing in real estate right now are HUD homes; they’re priced so low that it starts a bidding war. Then people overbid on the house, but you can’t finance a HUD home for more than the original sales price, and you’ll have to pay the extra money over the listing price in cash,” he cautioned.

Other things to consider, both Marsack and Jones-Cutler noted, are that a lot of foreclosures are sold via online bidding, so there’s a lot of “real-time” competition, meaning you have to constantly check the status of the sale; and since the homes are sold as-is, there’s no recourse if there’s a major problem.

“You have to know what you are willing and able to pay for the property, as well as factor in all costs to make repairs and improvements. … The last thing you want to do is feel like you’ve gotten a great deal and then find out you’re back to square one again if there are repairs needed beyond your budget and capabilities,” Jones-Cutler said.

Going once … home auctions

Auctions, which aren’t always for distressed properties, are an interesting way to purchase a home, said Jones-Cutler: “It sounds risky and it can be a double-edged sword — there’s the chance that there could be a bidding war … or the home could be bought for a steal.”

There are two types of home auctions: absolute and reserved.

“In a reserve auction, the seller reserves the right to accept or reject the highest bid.  So the property may not be sold if the final bid is not high enough to satisfy the seller,” said Jones-Cutler. “An absolute auction offers the property at a set date and time, and it’s sold at whatever the highest bid is. So if the highest bid is $2, it sells for $2.”

Depending on the type of auction, Marsack said, financing may be allowed; in that case, he said, the buyer typically needs to have the down payment on hand at the auction and must close on the mortgage within 30 to 45 days.

One drawback, said Jones-Cutler, is that you have no opportunity to have the property appraised or surveyed prior to the sale, and while auctions do offer disclosures, the homes are sold as-is.

Getting help from the pros

There are myriad benefits to investing in distressed properties, whether as a homeowner who plans to live in the house or as an investor, said Jones-Cutler. On top of getting a great deal on a home or making a lucrative investment, she said, it also benefits the surrounding neighborhood by staving off blight, and in turn, stabilizing housing values.

To that end, Jones-Cutler and her husband, Scott Cutler, have recently started Turn Around Real Estate, a new, comprehensive real estate investment company.

Their goal, said Jones-Cutler, is to “help rebuild Michigan one home at a time. Once an eyesore for the neighborhood, these homes are now being renovated and sold to first-time buyers.”

“Another aspect that’s near and dear to our hearts — being that we’ve never seen a market with so much hardship, so many good people in distressing situations — is that we want people to know there are a lot of options out there, and whether or not we can help fix the problem, we will help guide people to other professionals in our network who may be able to help,” Jones-Cutler said.

“If they want to stay in their home but not sure how, or want to get out from under their debt, give us a call — we can help, every day counts in making a bad situation better, so don’t wait any longer,” Cutler added.

Whether investing or seeking to avoid foreclosure, industry professionals — agents, mortgage brokers, contractors and appraisers — can help streamline the process.

“It’s definitely imperative to have a professional on your team, so you’re not going it alone. … There are so many addendums — it’s like a novel — you really have to have an agent involved … no layperson can look at a whole purchase agreement and understand the whole thing,” said Marsack.

For more information about FHA loans and the HUD 203(k) program, visit