Bill Schramm and Bethany Siwicki scoured property listings for three months before agreeing to see a home in Round Lake Beach, even though its online pictures didn't look promising.
"It looked like a pinata blew up in there," Schramm said. Every room was a different color, and the only way to tell the carpet once had been white was looking at the furniture marks.
But the home they visited bore little resemblance to the pictures. The walls were white, new carpet had been installed, and repairs made. The recently engaged couple immediately submitted an offer and are waiting to close on their first home purchase.
Sprucing up a home to sell it faster and for more money is a strategy frequently advocated by real estate agents. In this case, though, the seller is Wells Fargo Bank, and the home Schramm and Siwicki are buying is a foreclosure.
There are still plenty of dilapidated foreclosures on the market marred by water damage, mold, broken windows and missing plumbing fixtures, properties that hold little appeal except to investors and professional rehabbers.
But as the quality of foreclosures and the communities where they are located has improved, so, too, has interest in them by consumers. To entice those buyers and lessen their inventory of real-estate owned foreclosed homes, commonly known as REOs, banks are spending thousands of dollars on some foreclosures. In addition to new paint and carpet, floors are being refinished, old windows are being replaced, and leaky roofs are being repaired.
The strategy benefits the banks and homebuyers, who otherwise would have trouble securing mortgages on homes that a lender could term "uninhabitable" because of needed repairs. At the same time, it helps the broader real estate market because while the foreclosures still sell at a discount, it is not at the fire sale prices of unlivable properties.
For traditional home sellers, the trend of banks plowing money into foreclosures means they will have to be more realistic in their pricing, because the foreclosure for sale down the street may look a lot more inviting to prospective buyers.
"Foreclosures used to be fewer and far between," said Ray Millington, an agent at Century 21 Roberts & Andrews. "The problem is, we say we'll concede that sale, but what happens when another one pops up. It becomes an ongoing thing. It's not like you have (only) one in the subdivision anymore."
Real estate agents say they are having the same conversation with banks that they have with any seller, and it starts by identifying the target customer for a property. If the answer is an owner-occupant, agents recommend fixes that can range from a few thousand dollars of paint to $25,000 of kitchen upgrades. In the past, banks rejected such suggestions, viewing them as throwing good money after bad, but now some are heeding the advice.
Last month within the city of Chicago, 207 of the 472 single-family detached homes that sold were foreclosed properties. An additional 62 were short sales, transactions in which the homeowner sells the home, with the lender's permission, for less than the amount owed on the mortgage. Combined, distressed properties in February accounted for 57 percent of all single-family detached sales and 46 percent of all condos, according to the Chicago Association of Realtors.
The ranks of foreclosed homes are expected to swell this year. Last month, more than 2,500 homes in Illinois were repossessed by lenders, and another 7,000 were in foreclosure, according to RealtyTrac. While the number is down from previous months, it is largely thought to be artificially low because investigations into lenders' foreclosure procedures have slowed the process.
Nevertheless, Fannie Mae repossessed more than 262,000 single-family homes nationally last year, and as of Dec. 31 its inventory of single-family REOs was almost 163,000.
Under its "first look" program that began in September 2009, Fannie Mae will only consider offers from owner-occupants or buyers like nonprofits during the first 15 days a home is on the market. Fannie sold nearly 29,000 homes to consumers under that program during its first year.
Among last week's new Fannie Mae HomePath listings was a $211,900 Oswego home described as move-in ready with new carpet and fresh paint.
Buyers are jumping on the best REOs, and keen interest can lead to multiple offers.
A 2,700-square-foot home in Barrington, Ill., with "gleaming" hardwood floors that sold for $625,000 in 2007 fell into foreclosure last fall and was listed for sale for $479,900. Four price drops later, with the list price down to $375,000, a bidding war erupted among four potential buyers. The final sales price on the move-in-ready home was $395,000.
Meanwhile, in Naperville, Ill., a pristine foreclosure listed for sale in October for $339,340 went under contract in 18 days, and when it closed in early January the sales price was $361,000.
"The ones that are in good shape, people are snapping those up," said Mike Stodola, an agent at Koenig & Strey Real Living. "The ones that are left are ones that need major work."
Despite about $30,000 in improvements, the house Schramm and Siwicki will buy for $125,000 still needs work. The couple's first project is to remodel the kitchen.
"It's probably the most hideous livable house you'll see, but I can fix it," Schramm said. "Nothing even comes close to this house in terms of value per dollar. There's a ton of houses out there that cost less than $125,000. Do I want to buy them and move into them? No."
It's not just the house and the neighborhood that help lenders decide whether to make presale investments. It's also the potential risk of vandalism.
"There's no sense of putting a furnace in there if it's going to walk away the next day," said Abe Rabah, of Great Street Properties.
In Barrington Hills, Ill., down the street from one well-appointed home listed for $890,000, is another property, a foreclosure, that went on the market at $525,000. The Tudor-style home attracted some foot traffic but no serious consideration.
The house was removed from the market and almost $20,000 of updates and repairs are being made before it's relisted.
"We're doing everything that is going to make the property look better, but also make it financeable," said Connie Ritchie, an agent at Re/Max Suburban. "When you walk in (now), you say this is nice and clean. This is something I can work with."
Source: McClatchy-Tribune Information Services.