What It Takes to Buy a House in Foreclosure

By RON LIEBER

Published: October 29, 2010

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Kendrick Brinson for The New York Times

Jennifer Kuzara’s parents bought a foreclosed house to sell to her.

Your Money

Ron Lieber writes the Your Money column, which appears in The Times on Saturdays.

Would you buy a foreclosed home right now? How can anyone know what a real deal looks like these days, given all that we have gone through in the housing market?

Kendrick Brinson for The New York Times

Jennifer Kuzara says the process of buying and renovating a foreclosed house became a full-time job. It involved financial gymnastics and quite a bit of luck.

In their wake are aspiring owner-occupants. How hard could it be, they ask, to pick up one of these houses on the cheap and make it livable?

For an answer, consider Jennifer Kuzara, 32, a grants manager for a nonprofit organization here. From early 2009 to early this year, she spent about 1,000 hours on her foreclosure project. The gang of helpers she assembled included two real estate agents, a banker, an architect, a contractor and her parents.

To stand a chance of making the project work in the neighborhoods where she was willing to live, she needed $100,000 in cash. Ultimately, Ms. Kuzara and her parents were exposed to a fair bit of risk, all in the name of a bungalow in a middle-class neighborhood.

And while the specifics are particular to Ms. Kuzara, plenty of people in foreclosure-ridden markets in Florida, Arizona, Nevada and elsewhere are in for a house hunt that is going to look a lot like hers. The headlines may be raising all sorts of questions about whether the foreclosures were legitimate. But there will always be people who want to buy when things are really cheap and are willing to press ahead when the quest seems most challenging.

So this is the story of what it will take for their search to have a happy ending.

It began in 2006, when Ms. Kuzara had nearly six figures in student loan debt and the housing market was at its most heated. She was virtually certain that she would never be able to afford a home. “I remember thinking that it might have been the end of my American dream,” Ms. Kuzara said.

Two years later, after she had finished her Ph.D. course work in anthropology at Emory University, and begun full-time work in the nonprofit field, the housing market began to turn. Not long after, a friend was considering buying a foreclosed home as an investment property and encouraged Ms. Kuzara to look at the listings.

Through another friend, Ms. Kuzara found Lisa Iakovides and her business partner, Michael Redwine, real estate agents at a company called Atlanta Intown. They established some price parameters and some items that would be deal breakers, like mold and crooked rooflines.

Then they shopped for neighborhoods. One, East Atlanta, made the short list, even though Ms. Kuzara hit the floor of Mr. Redwine’s car one day when she heard gunshots on the way back from visiting a home there. She and Ms. Iakovides hadn’t even started up the walkway of a house in another neighborhood, Peoplestown, when a neighbor loudly made her feelings known about white people moving in.

Other homes told stories in subtler ways. “Squatters had taken them all over,” Ms. Kuzara said. “Some moved in furniture and their families. But there was one where I never would have known until I opened up a closet and saw a little stack of sleeping bags and blankets. And on the top ledge there was a knife, a fork and a spoon.”

Ms. Kuzara vowed to leave cookies and a nice note for whomever was living there if she bought that home, but she didn’t get it or many others. By the time she entered the fray, investors were already swarming. She bid on at least 10 homes over six months and lost them all.

The house she finally bought had been divided in half and turned into apartments, which might have been why she did not have to fight so hard for it.

The 1,100-square-foot bungalow sits high on a small piece of property in the Edgewood neighborhood. It is one of those places where you can walk a few blocks to the left and find two stores with a fine malt liquor selection, then stroll 10 minutes to the right to Bed Bath & Beyond for high thread-count sheets to sleep off the hangover. Ms. Kuzara’s block has a halfway house for former substance abusers next door and a beautifully renovated home across the street with an alarm service sign planted prominently out front.

Ms. Iakovides managed to get a preliminary $39,000 offer accepted by the bank on the home in early August 2009, and she began trying to set a closing date. Ms. Kuzara drove by the home each day, planning the renovation.

But one day she found the front door wide open and called her real estate agents in a panic, worried that vandals were casing the place or that squatters would take up residence. Without really asking the bank’s permission, the agents called a contractor to padlock the door. “Who would we have asked?” Mr. Redwine said, incredulously, as if the bank that still owned the house was actually going to return his calls.

Ms. Kuzara’s next step was to get together the money to pay for the place and the $60,000 or so in repair work. After trying early on in her hunt to cobble together various combinations of tax credits, down payment assistance programs and government loans, it became clear that most banks preferred all-cash offers for their foreclosed homes.

But Ms. Kuzara had no cash. Her parents, Mark and Jennie, had some savings but not nearly enough. So her parents borrowed $25,000 at about 8 percent interest against a life insurance policy and $50,000 more at a lower rate from his 401(k) and bought the $39,000 home themselves. They used the remaining money for the renovation, planning all along to sell it to Ms. Kuzara as soon as the repairs were done.

For that to work, however, Ms. Kuzara would need to qualify for a mortgage to buy it from her parents. She had no money for a down payment, though. To qualify for the Federal Housing Administration loan that she needed, the home, postrenovation, would have to be appraised at a high enough amount that her parents could give her some of the newly created equity for a down payment while still getting all their money back.

And therein lay the risk. Because Ms. Kuzara bought one of the worst homes on a nice block, her agents were convinced that the renovation could yield an appraisal at the value that the bank required.

It helped that they had ushered in a contractor they had worked with before, whom they could count on to stay within the strict budget. Under his supervision, the renovations were finished in less than two months.

Then came the deciding moment: the appraisals. One came in at $130,000, while the other was for $145,000. As a result, the bank allowed Ms. Kuzara to borrow $100,000 to buy the home from her parents and thus make them whole. Then she used some of the remaining, newly created equity for the required down payment.

Ms. Kuzara moved in a year ago this weekend, and today the cozy house has three bedrooms, two baths, a front porch for dinner parties and a backyard for her two dogs. She’s furnished the place with chairs from consignment stores and thrift shops and has assembled a nice collection of vintage cookware and dishes.

She pays $828 a month on her 30-year fixed-rate mortgage, including taxes and insurance, and she has a roommate who chips in $500 month.

Including the weeks when she painted every inch of the interior, Ms. Kuzara spent about 1,000 hours on her foreclosure project — poring over listings, researching every last one in county databases, visiting houses and making her eventual home habitable.

So anyone who wants to do what she did needs to be ready to put in that much time. You may need a source of funds or willing co-conspirators like Ms. Kuzara’s parents. And you will need a team of people who know the rules of the foreclosure game cold.

The odds of success are certainly long. But for those with the patience to pull it off, it sure seems a whole lot of fun to play this game and win.

“It turned out to be a sweet little house,” said Mark Kuzara, Jennifer’s father. “And I think somewhere down the road, she’ll sell that house and come out pretty nicely on it.”