Waiting for a sucker from Oz

My recent post on the wisdom of Australians buying up $600 million of US foreclosed properties has provoked a few interesting comments and questions by email from readers, so I thought it warranted a quick follow up. Firstly, here is what one concerned Californian reader had to say:

Aussies planning to be millionaires by buying anything in California should think about this. There are literally hundreds of thousands of knowledgeable CASH buyers who are NOT buying. What do we know, that Aussies don't know? First if ANY house is going to be sold, at least 5-6 insiders will get a first shot at the deal..and they will buy in hours. Any property that you see on a list...is OLD, and probably a bad deal....

There is a small house across the street from me. In 2005 it cost USD $380,000...today it is for sale for $120,000. They have an auction every day. NO BUYERS! Why aren't people buying? The prices are TOO high! If you buy and rent out...what is to stop your tenant from giving notice and moving next door to the next empty house for LOWER rent? Nothing! So how many months can you handle no tenants---no rent money? Tenants are not stupid...

I look outside my window and see five For Sale signs ---all "good deals", but why haven't they sold? They were from $750-899,000 only 4 years ago. One of them wants $450k....and has been for sale for 2 years. The asking price drops every month. Why buy TODAY...when the house will be cheaper next week? I have seen some houses go through 4 buyers and sellers in 5 years. All the buyers thought they would be rich. Now you tell me why they sold? Rents are dropping every month...and my county has 22% unemployment. More than one in five adults has NO JOB!

You want to be rich? DO YOUR HOMEWORK. NO ONE wants to live near gangs. Gangs are attracted to low rents and vacant houses to squat in. Gangs move in and all house prices drop in the area. I saw an ad for the 888 company showing a newer house near Atlanta Georgia to sell to Aussies. I called a friend who lived nearby the house. There was a gang murder - two people shot one block from the house. Police have no suspects. People in gang areas will not talk...or they will be killed next.

You can see the listing on the 888 website. It's on a corner lot, in a suburb of Atlanta, Georgia....waiting for a sucker in OZ land. 

I think this comment speaks for itself about some of the risks involved in buying US foreclosed properties. In another recent post, I discussed an additional risk that any Australian buying US foreclosed properties needs to be mindful of: the possibility of lawsuits from previous owners of the property claiming that they have been wrongfully evicted. In response to this, one reader asked if it is possible to protect yourself from such risk through title insurance.

I'm far from an expert on these matters, but the answer to the question seems to be: "Yes, but...". The problem here is that some insurance companies have started to shy away from insuring foreclosed properties. And even with those that are willing to insure properties, you can't entirely rule out the risk of getting caught up in a complicated legal mess if the foreclosure is challenged in court. From one recent article in the Washington Post:

The title insurance industry is maneuvering to protect itself from losses if courts rule that banks have played fast and loose with the foreclosure process. But people who buy foreclosed properties from banks may face some degree of loss despite having a title policy.

Fidelity National Financial, the largest title insurance company, is leading the industry in demanding that lenders warrant that they have followed all legal procedures in the handling of foreclosures and indemnify the title insurers if a court decides otherwise.

"They are putting on record that it is absolutely the bank's responsibility," said Susan Wachter, professor of real estate at the Wharton School of the University of Pennsylvania.

But Wachter said buyers of these properties risk getting caught up in litigation among title companies, banks and possibly other entities if the foreclosure is overturned by a court. "There is still uncertainty," she said. "It's a question of litigation; it's a question of transaction costs."

In other words, title insurance should protect you, but there is so much legal uncertainty surrounding foreclosures right now that basically nobody really has a clue what is going to happen. And this is my point. Is the average Australian investor that is buying US properties sufficiently educated about these risks?

To conclude, yesterday's Wall Street Journal had a truly bizarre story about how residents of Salem, Massachusetts are turning to witches to exorcise the demons from their foreclosed properties. If you are hellbent on buying a property in the US, maybe you'd better look into this.

SALEM, Mass.—There's a certain look and feel to a foreclosed home, and 31 Arbella St. has it: fraying carpet, missing appliances, foam insulation poking through cracked walls.

That doesn't faze buyer Tony Barletta since he plans a gut renovation anyway. It's the bad vibes that bother him.

So two weeks before closing, Mr. Barletta followed witch Lori Bruno and warlock Christian Day through the three-story home. They clanged bells and sprayed holy water, poured kosher salt on doorways and raised iron swords at windows.

"Residue, residue, residue is in this house. It has to come out," shouted Ms. Bruno, a 70-year-old who claims to be a descendant of 16th-century Italian witches. "Lord of fire, lord flame, blessed be thy holy name...All negativity must be gone!"

The foreclosure crisis has helped resurrect an ancient tradition: the house cleansing. Buyers such as Mr. Barletta are turning to witches, psychics, priests and feng shui consultants, among others, to bless or exorcise dwellings.

What can I say?