How To Buy a Home at a $100,000 Discount
To pare down their growing inventory of properties, Fannie Mae and
Freddie Mac are scrambling to unload nearly 150,000 foreclosed
homes. And that means 2004-esque deals — like requiring as little
as 3% down, offering to pay a portion of the closing costs and
arranging special financing and warranties for repairs and
It's another option for home owners who want to trade up — and an
easier way into the market for first-time home buyers, says Dean
Baker, co-director of the Center for Economic and Policy Research
who studies the housing market.
The best bargain might be the home's price. A SmartMoney analysis
revealed that buyers could save $100,000 by buying a Fannie or
Freddie home instead of similar fair-market properties just a few
And while many of Fannie and Freddie's homes are at the lower end
of the market and in less-desirable areas, a SmartMoney.com search
of Fannie Mae and Freddie Mac listings revealed that buyers could
find properties in good neighborhoods — and for $100,000 less than
comparable houses nearby. For example, a five-bedroom, three-bath
with a backyard, deck and two-car garage in tony Alexandria, Va.,
was listed for $445,000, $100,000 less than the average listing
price in the area, according to Trulia.com. Four blocks away, a
similar non-foreclosed colonial is listed for $639,900.
Or how about a three-bedroom, two-bath in Bergen County's leafy
River Edge, N.J for $359,900 -- $85,000 less than the average
listing in the area. One avenue over, a non-foreclosed similar home
is listed for $474,888.
The downside: Angry neighbors. These types of listings are
devaluing nearby properties, says David Howell, realtor and
executive vice president at McEnearney Associates, which sells
homes in the metropolitan Washington D.C. area. That means in some
areas where Freddie and Fannie homes are on the market, buyers
could find a better deal on a nearby market-rate home that doesn't
require repairs, he says.
Buying a Fannie or Freddie home can be more complex than pursuing
an open-market real estate listing — or even a commercial bank
foreclosed property. There's a smaller selection of appealing
properties — there were just six higher-end homes listed on a
recent day in Alexandria, for example — and those tend to sell the
fastest. And there's little room to negotiate price.
"Our goal is to recover as much as we can to offset our loss and
not to be low balling properties just to move them," says a Freddie
Mac spokesman. "We absolutely have no motivation to be leading a
downward spiral in home prices."
The three best features of Fannie and Freddie foreclosures that
make digging for these deals worthwhile:
Small Down Payment
For its foreclosed properties, Fannie Mae will accept down payments
as low as 3% on 30-year mortgages at the same interest rates banks
are currently offering. And Fannie Mae doesn't require private
mortgage insurance. Compared to a typical bank mortgage, which
requires 10% down, plus PMI for buyers with less than 20%, that's a
huge savings — an estimated $51,000 up front and upwards of $2,500
per year PMI on a $300,000 mortgage.
It's a tradeoff, though. For buyers with 20% down, mortgage
payments on a 30-year mortgage loan at 5% would be $1,288 a month.
With just 3% down, the buyer would need to borrow $291,000 and make
a $1,562 monthly payment.
Help with Renovations
Fannie and Freddie have fixed big flaws like leaky roofs and
damaged electrical work, and they often handle small projects like
replacing appliances that are broken or missing, tearing up old
carpet, or fixing other damage left by former owners or
Now, to entice buyers who want to update or upgrade, many of Fannie
Mae's properties come with an optional mortgage that includes extra
financing up to $30,000 for repairs and improvements. But with a
little down payment and the extra amount tacked on, the buyer could
end up owing more than the house is worth — especially if home
prices continue to drop.
Buyers who plan to live in their Freddie Mac-purchased home will
get to see properties for at least the first 15 days they're on the
market — before the listing opens to would-be landlords. Many
bank-owned foreclosure properties are snatched up by cash-stocked
investors who can wait out the downturn to sell later at a
And Fannie and Freddie homes can be seen inside and out — unlike
some regular foreclosure listings. Consider bringing along a
contractor when you view the home to help spot areas that need
repairs and provide pricing. (Most contractors will do this for
"It gives families who want to buy a home to live in the
opportunity to look and bid without competition from cash-rich
investors," says a Freddie Mac spokesman.
Written by: AnnaMaria Andriotis