Case Study: Buying a Foreclosure on the East Side Providence RI

I post this as a real life example of buying on the East Side of Providence, although to be fair, we don’t see a lot of foreclosures on the East Side, so getting one in a decent area is rare, and you have to have the stomach for going through the process. At present, I see just 5 foreclosures listed in the MLS, all condos.

As I move through this example, I will highlight what the buyers faced when going through the process and some to the challenges you too may have when purchasing a foreclosed property on the East Side.

The property itself is a condo which at the height of the market in 2005, and sold in the low 300′s. It is one of our typical Providence triple deckers, converted into “luxury condos”. The unit itself has all the great bells and whistles: granite, stainless, open floor plan, zero clearance fireplace, etc.. The tax assessor places its “value” at $225,000. The list price when our buyers made an offer was $165,000.

When we first met with our buyers, we talked about what would makes sense for them financially. We are typically not big fans of the small condo conversions, but we all agreed that if the mortgage payments could approximate the rent they were paying, give them equity in an ownership position, tax savings, a great space, then it made sense. So place an offer they did.

After a “highest and best” round, our clients secured the property from Fannie Mae, the owner of the foreclosed property. Then we got in down and dirty with the financing. Not exactly pretty and let me tell you why.

First of all, a small condo association is not “FHA approved”. An FHA approved property will allow the buyer to only put down 3.5% as a down-payment. How many first time homebuyers these days have more? We are still recovering from a recession, the worst since the GREAT DEPRESSION and unemployment in RI is over 12%. We were able to get over this hurdle by getting a loan locally, by Coastway Bank in Cranston, so the buyers were able to put down just 5%.

Here is the kicker though:

Their mortgage payment with still low interest rates was around $820 a month (sure beats the $1200 they pay in rent right now, so far, so good) BUT the TAXES are $570 per month, bringing their payment with PMI, utilities, insurance, etc. to about $1600.

Yikes, why not stay in the rental and just WHAT is happening here?

The answer has to do with the “non-owner occupied tax rate” and the high assessed value by the city of Providence.

Providence has two tax rates — one for owners of property who live in the house — which is $15.19 of assessed value (in this case $3,412) or if the property is non-owner occupied — the rate doubles to $30.38 per thousand of assessed value (here again, in this case, $6836). Because the bank or Fannie Mae owns the property, the tax rate for this year is $6,836 or $570 per month.

The first thing to understand is that the tax rate travels with the property for the year, not the owner. That means that the new buyer is on the hook for the full amount until 2012, at which point they can prove their residency and get the reduced rate. So for all intents and purposes, the buyer will have to pay the $570 a month until 2012.

All I can say is that just didn’t work for these buyers, despite the good deal they secured. Nor should it, but what options does a buyer of this type of property have? It is a good deal for sure, priced at $165,000 while assessed at $225,000.

What we discussed with the buyers is that this situation is temporary. Here is what we recommended:

1. Ask the bank to roll the additional taxes into the purchase price so the buyers can finance the higher taxes and not to have to come up with so much out of pocket. The bank, and cooperative selling agent was willing to do this.

2. Appeal the assessment. If you purchase a property for $165,000 for example, but it is assessed at $225,000, then there is a large discrepancy between how the city views the property and how the market views it. Contact your realtor to help you with comparable sales to make this case to the city. We will be helping our buyers with this.

The good news is that come 2012, the tax will be lower, the buyers are in a location that they love, getting tax benefits though writing off interest payment, and paying themselves instead of a landlord.

In the end…….well….this is not the END of the story since we just went through inspections today…….they will have a place to live that they are proud of, they are paying themselves and building equity, and they building a more secure future.

More later to follow on this progression……..but I hope that this gives you some insight into the challenges in purchasing a foreclosure on the East Side.