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Open houses can be a wonderful way to find your next house. They can be just as helpful in gathering intelligence about a neighborhood, getting a feel for its housing stock or simply scoping out real-estate agents that you might like to work with.

But what should you ask when you pay a visit? In this month’s Buying Advice, we consulted agents and other real-estate experts for their insights on how to navigate open houses.

We’ll also update you on the latest housing and mortgage stats, and see how most people are feeling about the housing market’s prospects. And real-estate author and blogger Ilyce Glink will answer one reader’s question about whether he can legally have two primary residences.

Open-house questions
If you play your cards right, an open house can tell you a lot more about a property than its floor plan or the condition of its floors. The key is asking the right questions, agents say. (Or if you’re looking with your agent, making sure they do it for you.)

Here are some questions to ask the listing agent and how these questions might help you in your purchase of the home:

Have you had any offers on the property? That lets you know if you have competition for the property, says Kim Drusch, an agent with Century 21 Award in San Diego. You’d also want to know if the sellers had rejected any offers and why, agents say. It could help you better craft an offer that will meet with their approval.

Has this house been in escrow? If it has, and didn’t sell, you’d want to know why. Was it an appraisal issue? Did a home inspection turn up some major damage? If it has been in escrow, ask if any inspections were done on the house. If there were, ask for copies of these reports, so you know what you’re dealing with, and what kind of secondary inspections you might need should you decide to make an offer.

How long has the property been on the market? If it’s getting a little stale, it might be ripe for a lower offer, experts say. Likewise, find out if there’s been a price reduction and when it happened.

Why are the owners selling? The agent showing the house is likely to remain mum on this one. But, then again, she might also let it slip if they are moving soon, are under financial pressure or are building another house and might need more time in the house if she’s a little desperate to move the property. Any information you can glean can help you decide how much to offer, when to close, etc.

Are there any liens on this property? You don’t want any surprises, so make sure there aren’t any construction liens, tax liens or other claims on the property resulting from unpaid debt, such as unpaid homeowners association dues.

Is the home going to meet a lender’s appraisal expectations? Do you have comparable sales in the last 90 days? These days, with prices on the decline, and more and more properties getting taken back by banks, appraisal at the listing price isn’t always a sure thing. Take a look at the recent comps and have your agent check pending sales to make sure you won’t get stuck once you’ve starting spending money on inspections and other aspects of the process.

Are there any other costs of ownership? Here again Drusch says you want to make sure there’s nothing to surprise you after closing.  If it’s in a condominium complex or other planned community, ask about association dues and additional taxes or assessments, especially if it’s a newer community. And if there is a homeowners association, get its phone number and call it to make sure there aren’t any rules that conflict with your lifestyle, pets, etc. You don’t want to find out, after the fact, that your husband can’t park his work truck in the driveway of your new home, Drusch says.

Have your agent follow up with the listing agent via fax or email to get it all on paper.

“Make sure everything is in writing,” Drusch says. And, as always, make sure you have your own home inspection done, even if you have been assured there are no problems with termites, plumbing, etc.

Home-sales update
Existing-home sales dipped 0.8% in April from the previous month and 12.9% from the previous year, when the homebuyer tax credit was in effect, according to data from the National Association of Realtors. The national median home price declined 5% from last April to $163,700.

Lawrence Yun, the NAR’s chief economist, says tight credit and low appraisals are putting the brakes on many home purchases.

“Although sales are clearly up from the cyclical lows of last summer, home sales are being held back 25% to 20% due to the very restrictive loan-underwriting standards,” Yun said.

Moreover, distressed homes, which trade at double-digit discounts to traditional listings,  are still weighing heavily on the market. Distressed homes made up 37% of sales in April, down from 40% in March, but well above the 33% posted at the same time last year.

Investors are the most excited about the still-floundering market. All-cash deals accounted for 31% of transactions in April, down from a record 35% in March.

Mortgage rates drop
The one bright spot for buyers is that mortgage rates continue to drop, increasing affordability. Fixed-rate mortgages declined for the fifth straight week, as of May 19, Freddie Mac said in its Primary Mortgage Market Survey, with a 30-year fixed averaging 4.61% and the 15-year averaging 3.8%.

Economists versus consumers: The outlook
Just don’t look for that investment to appreciate in value immediately. Economists don’t predict a return to home-price gains until early to mid 2012.

Fannie Mae, for one, expects the median home price to decline 6% in the second quarter of this year from the same time in 2010, with those losses slowly tapering off this year, until the market hits bottom in the first quarter of 2012.

Analysts at J.P. Morgan expect an additional 6% decline in prices from where the market stands today.

But perhaps most bearish are consumers themselves.

In a joint housing survey conducted by Trulia and RealtyTrac, released in mid-May, 54% of those polled said they don’t expect the housing market to recover until 2014 or beyond. Twenty-four percent expect a recovery in 2013.

It’s clear, says Fannie’s chief economist Doug Duncan, that despite low prices, low interest rates and improving job numbers, consumer attitudes have yet to rebound in a way that will really push the needle up on home sales.

“In spite of the positives surrounding the housing market, we see that consumers are still hesitant to take on a large financial obligation,” Duncan says.

Still, he says he expects home sales to rise some this year, as the economy gets on surer footing.

And for many, it might begin to make more sense to buy. According to Trulia’s most recent data, it is now more affordable to buy a home than rent a similar home in 78% of major U.S. cities.

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1. Wrecked credit

Regardless of whether a foreclosure is because of a strategic default or other circumstances, it damages a consumer’s credit score. “A foreclosure is one of the stronger predictors of future credit risk,” says Craig Watts, public-affairs director of FICO, a credit-rating company. Foreclosures remain on a credit report for as long as seven years, with the impact gradually lessening over time. Watts says FICO scores “generally begin to recover after a couple of years,” assuming the consumer stays current on all payments and other credit accounts. He says the impact of a foreclosure on a credit score depends on other factors in the borrower’s credit history. The ABA says a foreclosure drops a FICO score by 100 to 400 points.

2. Difficulty getting new mortgage

A voluntary foreclosure also can affect a homeowner’s ability to qualify for a new mortgage for years to come. Peter Fredman, a Berkeley, Calif., consumer attorney, says Fannie Mae and Freddie Mac will not approve a mortgage for four years after foreclosure, while the ABA says it can take three to seven years to qualify for a new mortgage. In addition, Fannie Mae this past summer announced a tough new sanction on people who deliberately default on their mortgages. These borrowers will be ineligible for a new Fannie-backed mortgage for seven years after the foreclosure date.

3. Taxes still due

Tax liability is another potential danger of defaulting. Although the Mortgage Forgiveness Debt Relief Act of 2007 offers protection from federal taxes after a foreclosure through 2012, state taxes still may be due on unpaid debt.

4. Deficiency judgment

A lender can also pursue the remaining debt from an unpaid loan by obtaining a deficiency judgment against the delinquent borrower, or it may work with a collection agency to recoup losses. Ethical questions also surround strategic defaults. A survey by Trulia.com and RealtyTrac found that 59% of homeowners would not consider defaulting, no matter how much their mortgage was underwater, although the other 41% of homeowners said they would consider a default.

Less risky in some states

Despite the potential negative consequences of a strategic default, the move is less risky in some states than in others. “The first question for anyone considering a strategic default is whether the homeowners will be liable for the debt anyway,” Fredman says. “Each state has different rules.” Nonrecourse laws protect homeowners in some states. According to research from the Federal Reserve Bank of Atlanta, the 11 nonrecourse states are Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington and Wisconsin. When a borrower defaults in one of these states, the lender can take the home through a foreclosure but has no right to any other borrower assets. Home-equity loans are ineligible for this protection unless they were used as part of the home purchase. In some areas, lenders are so overwhelmed with defaulting customers that homeowners can live in their homes for free for a year or longer before the foreclosure is complete. The average length of time from default to eviction is 400 days in California, Fredman says.

Price of freedom

The potential consequences of strategic default cannot deter some homeowners from taking the plunge, says Frank Pallotta, executive vice president and managing director of the Loan Value Group in Rumson, N.J. “While everyone understands the credit-score impact of a strategic default, most borrowers don’t seem to care,” Pallotta says. “They think a 200-point hit on their credit score cannot offset the benefit of living for as long as 18 months rent- and mortgage-free. They see strategic default as a form of financial freedom, especially if they live in a nonrecourse state and know someone who has done this.” Fredman, who developed the Should I Pay or Should I Go online calculator to help consumers evaluate a strategic default, says homeowners considering a strategic default should research tax laws and state regulations about loan defaults. Even nonrecourse states’ laws can affect defaulting borrowers, he says. “I also think everyone should consult an attorney and probably an accountant, too, because the relative cost of these professionals is not nearly as high as the potential cost of making a mistake,” he says.

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Many people have either gone through foreclosure, a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership of the property, or know someone who has. RealtyTrac released its U.S. Foreclosure Market Report on April 15 for the first quarter of 2010. The report calculates foreclosure filings, including default notices, scheduled auctions and bank repossessions, and showed that 932,234 properties were involved in the first quarter. That was a 7% increase from the last quarter of 2009 and a 16% increase from the first quarter of 2009. An astonishing one in every 138 U.S. housing units received a foreclosure filing during the quarter. If you or a loved one are facing foreclosure, make sure you understand the process. While it varies from state to state, there are normally six phases of a foreclosure.

Phase 1: Payment default

A payment default occurs when a borrower has missed at least one mortgage payment. The lender will send a missed-payment notice indicating that it has not yet received that month’s payment. Typically, mortgage payments are due on the first day of each month, and many lenders offer a grace period until the 15th. After that, the lender may charge a late-payment fee and send the missed payment notice. After two payments are missed, the lender may send a “demand letter.” This is more serious than a missed-payment notice; however, at this point the lender is probably still willing to work with the borrower to make arrangements for catching up on payments. The borrower would normally have to remit the late payments within 30 days of receiving the letter.

Phase 2: Notice of default (NOD)
A notice of default is sent after 90 days of missed payments. In some states, the notice is placed prominently on the home. At this point, the loan will be handed over to the lender’s foreclosure department in the same county where the property is located. The borrower is informed that the notice will be recorded. The lender will typically give the borrower another 90 days to settle the payments and reinstate the loan. This is referred to as the reinstatement period.

Phase 3: Notice of trustee’s sale
If the loan has not been brought up-to-date within the 90 days after the notice of default, a notice of trustee’s sale will be recorded in the county where the property is located. The lender must also publish a notice in the local newspaper for three weeks indicating that the property will be available at public auction. All owners’ names will be printed in the notice and in the newspaper, along with a legal description of the property, the property address and when and where the sale will take place.

Phase 4: Trustee’s sale
The property is placed for public auction and will be awarded to the highest bidder who meets all of the necessary requirements. The lender, or firm representing the lender, will calculate an opening bid based on the value of the outstanding loan, any liens and unpaid taxes, and any costs associated with the sale. Once the highest bidder has been confirmed and the trustee’s sale is completed, a “trustee’s deed upon sale” will be provided to the winning bidder. The property is then owned by the purchaser, who is entitled to immediate possession.

Phase 5: Real-estate owned (REO)

If the property is not sold during the public auction, the lender will become the owner and will attempt to sell the property on its own, through a broker or with the assistance of an REO asset manager. These properties are often referred to as “bank-owned.” The lender may remove some of the liens and other expenses in an attempt to make the property more attractive.

Phase 6: Eviction
The borrower can often stay in the home until it has been sold either through a public auction or later as an REO property. At this point, an eviction notice is sent demanding that any people vacate the premises immediately. Several days may be provided to allow the occupants sufficient time to remove any personal belongings, and then typically the local sheriff will visit the property and remove the people and any remaining belongings. Belongings may be placed in storage and retrieved later for a fee.

The bottom line
Throughout the foreclosure process, many lenders will attempt to make arrangements for the borrower to get caught up on the loan and avoid a foreclosure. The obvious problem is that when a borrower cannot meet one payment, it becomes increasingly difficult to catch up on multiple payments. If there is a chance that you can catch up on payments — for instance, you just started a new job after a period of unemployment — it is worth speaking with your lender. If a foreclosure is unavoidable, knowing what to expect throughout the process can help prepare you.

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The nation’s housing inventory is cluttered with foreclosures, short sales and homebuilders willing to make a deal. If you’re in the market to buy a home today, you’re likely weighing the benefits of each type of property available for purchase. Don’t be fooled. Not all bank-owned foreclosures are sold at deep discounts. Not all builders are slashing prices. Short sales can be a crapshoot, with some buyers enduring months of waiting and still not getting the property. All things considered, it’s possible that your best deal is purchasing a traditionally sold existing home, so don’t count those out of the running. To get the most for your money, it’s important to understand the local market’s inventory; market dynamics will have a lot to do with how various types of homes are priced. Also, do some soul-searching to determine how much risk you’re willing to take and the amount of time and money you’re willing to invest in a home.

Bank-owned properties

Foreclosures reclaimed by the bank, often called bank-owned properties, are often sold at a discount. However, the size of the discount depends on the market you’re in. A recent report from Zillow.com found that the typical discount for bank-owned properties, compared with a traditionally sold home, averaged 20% to 30%. According to separate data from RealtyTrac, an online marketplace of foreclosure properties, the average discount on bank-owned properties was 34% in the first quarter. There is more than one reason why the selling price of a foreclosure is lower than a traditional home. The seller is typically a bank, and would like to move (the property) off the books as quickly as possible. A traditional seller is interested in getting a certain price and is willing to stay in the market. Also, the condition of the home can be an issue. A buyer who wasn’t able to make mortgage payments also probably wasn’t able to keep up with needed maintenance. One of the biggest mistakes homebuyers make when buying a foreclosure is underestimating how much it’s going to cost to repair it. It usually costs a lot more than you think, you can add value to a property by rehabbing it, but probably not more than the cost you put into it. For the lower price, buyers also need to accept that they’re most likely purchasing a home that has been sitting vacant, which comes with its own set of issues because small problems — a leak, for example — can become big ones if no one is there to notice them. These homes also may have limited seller disclosures, because the owner — the lender — hasn’t been living in the home and thus has less information to disclose. Home inspections are generally recommended regardless of what type of property you’re buying, and they’re essential in the case of a bank-owned property. Location matters, too, in the pricing of a bank-owned foreclosure. In places with the highest incidence of foreclosure, bank-owned properties garnered the smallest discounts, compared with traditionally sold existing homes. The places that did not have very many foreclosures right now had large discounts. Another way to look at it: A homeowner aiming to sell his home in a market where a large percentage of sales are foreclosures will likely have to price it like a foreclosure just to be competitive.

Short sales

Short sales offer some of the best deals. A short sale is when the seller owes more on the mortgage than the home is worth, and the lender agrees to accept less for the property to make a sale. But even if you save money on a short sale, you could pay in other ways. Although lenders and government programs are trying to speed up the process required to complete a short sale, a buyer could still wait months just to find out he or she failed to get the home. The home is discounted partly because of the uncertainty that the buyer experiences. You need to understand there’s a reason why they’re less money — you have to play the game, you have to be patient. The market generally discounts short sales by 5% to 8%, compared with traditional sales.

New homes

In many markets, the supply of new-home inventory is dwindling. That has caused pricing in the new-home market to stabilize. That is, fewer bargains may be available for new-home buyers. There is less flexibility on the builders’ side to negotiate prices, plus with supply more in control, there’s not as much urgency to drop prices to move the homes that are currently sitting on the market. Buyers typically pay a 20% premium for a new home, compared with a traditional (nondistressed) existing home, but that also varies by location. That isn’t to say builders won’t find other ways to make a deal. They’re still willing to throw in incentives, like finished basements, as a way to sell a home. But if you’re looking to get the lowest price on a home, this might not be the best route. And if there are distressed sales in new communities you’re considering, proceed with caution. A lot of foreclosures in the area will drive down the prices of nonforeclosure homes, and that can extend to new-home inventory. It’s not impossible to find foreclosures and vacant properties in communities that aren’t even finished yet.

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The foreclosure crisis hit a new peak in the first quarter, as banks took back the largest number of properties to date. The number of homes entering REO status (short for “real estate owned” by a bank) climbed 35% to 257,944 — the highest quarterly total ever — from 190,543 in the first quarter of last year and 9% from the previous quarter. The increase comes as lenders seized more property that couldn’t qualify under the Obama administration’s Home Affordable Modification Program (HAMP). “There have been delays throughout the system, and it has taken longer for properties to go from delinquency to default,” says Rick Sharga, senior vice president at RealtyTrac. Once rejected for HAMP, however, these properties are now moving to foreclosure at an accelerated pace, Sharga says.

More properties moving through pipeline

Foreclosure filings — from notices of default to bank repossessions — were reported on 932,234 homes in the first quarter of this year, a 16% increase from the same period last year and a 7% jump from the previous quarter. And the pace accelerated near the end of the quarter, with foreclosure filings reported on 367,056 properties in March, an increase of 19% from the previous month and the highest monthly total since RealtyTrac began issuing its report in January 2005. Foreclosure auctions were scheduled on 369,491 properties during the quarter, the highest quarterly total since RealtyTrac began compiling its report. “There have not been a lot of households that have been successful under HAMP,” says Gary Painter, director of research at the University of Southern California’s Lusk Center for Real Estate. “It’s likely that many of the people who could be helped have been helped.” The good news is there doesn’t appear to be a huge wave of properties entering default.  In the first quarter, 304,799 properties received default notices, an increase of just 1% from the previous quarter and a decrease of 1% from the same time last year. Default notices have dropped 11% from their peak in last year’s third quarter.

Troubled states

Nevada continued to have the highest foreclosure rate in the quarter — four times the national average — with one in every 33 households receiving a foreclosure filing, followed by Arizona, Florida, California and states where employment has plummeted, such as Utah, Michigan, Georgia, Idaho and Illinois. Foreclosure filings were reported on 34,557 properties in Nevada during the first quarter, a 15% increase from the previous quarter but a 16% drop from the first quarter of 2009. Foreclosure filings in Arizona were reported on 55,686 properties — one in every 49 households — a 22% increase from the previous quarter and a 13% increase from the same time last year. Florida posted the third-highest foreclosure rate, with filings recorded on 153,540 properties — one in every 57 households — a 7% increase from the fourth quarter and a 29% increase from the same time last year.

Sitting on delinquencies

Just how many foreclosures move through the foreclosure process and when banks sell them will be key factors in how much more real-estate prices could fall before they recover. Most of these bank-owned properties are not making it onto multiple listing services, analysts and brokers say, despite banks having more of them to contend with. “We have about 860,000 REOs in our database, and only about 30% of them are available for sale on the MLS,” Sharga says. “That means you have another 550,000 to 600,000 that have yet to hit the market.” By keeping this “shadow inventory” off the market, banks are keeping prices unnaturally high in this soft economy, says Leo Nordine, a Los Angeles-area broker specializing in REO properties. “[Lenders] want to keep postponing them for as long as they can,” Nordine says. “Prices have stabilized” in many areas because banks have kept these properties off the market, he says, adding that banks will likely continue to do so until the economy picks up again.

A long, painful recovery

Meanwhile, foreclosure prevention efforts don’t appear to be helping a significant number of borrowers. While 1.4 million homeowners were offered trial modifications under HAMP through the end of March, just 230,000 homeowners had their modifications made permanent. That’s a drop in the bucket compared with the 5.5 million delinquent loans Sharga says are on the books. Acknowledging this poor progress, the government revamped HAMP last month to provide additional mortgage assistance for unemployed job seekers, increase payments to second-lien holders and give some underwater homeowners the chance to refinance into loans backed by the Federal Housing Administration. This could slow the number of homes entering foreclosure, but it probably won’t make a huge dent in the number of properties being taken back by the banks. “Many people are so far upside down [in their home’s value] they are not even eligible,” says Helene Raynaud, vice president of housing for the National Foundation for Credit Counseling. And since HAMP is voluntary, lenders and investors are still deciding which properties they want to take back. “The government is really trying, but there are some issues of accountability and enforcement with servicers.” And, Raynaud says, there are some questions about how many of these modifications will end in redefault, given borrowers’ still-high levels of debt. Very few servicers are requiring these borrowers to get debt counseling, she says. Given these factors, economists expect a steady stream of foreclosures to hit the market for the next several years. But they don’t think it will derail a recovery. “I think we are very close to a recovering housing market,” says Celia Chen, senior director in charge of housing at Moody’s Economy.com. “We expect a slight decline and then flat prices until 2011.” However, Painter says you might want to brace yourself for a bit of a bumpy ride. “I think we are going to see upticks and downticks as the process happens,” he says. “But generally we are going to be stuck in place for a while.”

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