Deal or no deal?
Five things you need to know to buy a home in foreclosure
As we mark two years of declining home values, it’s anyone’s best guest as to when the real estate “bubble” will be completely empty and airless. I can tell you that with declining home values and the economic downturn, if ever there was a time to be involved in a great real estate deal, the time is now. Homes that ended up in some form of foreclosure increased 79% in 2007 over the previous year (Associated Press, January 29, 2008). In 2008, foreclosures continue to rise at a rapid rate. Nevada, California and Florida lead as the top three foreclosure states in the United States. In Florida, one is for every 282 homes in foreclosure.
Not only is it important to the economy that this foreclosure inventory is dissolved through purchases, there are some fantastic opportunities for people to buy. There are some important factors to be aware of before considering your first foreclosure.
1. The hunt begins: You need to know where to find the properties. There are many websites available if you just do a quick search. I always recommend working with an experienced real estate agent who has access to the Multiple Listing System (MLS) and knows the area. There are some agents who work with other realtors who have spent money preparing the property for you to move into. Basically, the listing broker has spent their own funds to paint and clean the property to make it a “turnkey” solution for a potential buyer. These properties always “show up” better and take away the storm cloud image most have about foreclosures; Missing toilet, A/C unit stolen, etc. Use the Internet to research properties if you want to explore on your own. There are many great sites that can give you a lot of information about properties.
While researching my Sunday morning paper in the Real Estate section, I came across a quick article naming the top foreclosed subdivisions in my county. Finding this information will give you an idea of where the opportunities are to find a deal. Supply and demand play into the economic environment of real estate, which in theory means that if there are 100 foreclosed properties in a city of 10,000 houses, it would have more influence than if that same city only had 1 foreclosed house.
2. How much is it worth?: Not all properties owned by the bank are good deals. Some of the properties in foreclosure today don’t have much equity in them because they were purchased with flexible lending practices and banks didn’t require the 20% down payment. You will need to do some homework if you are working without a licensed real estate agent to determine property values. Using the easiest way websites to do this and I would recommend keeping it simple and looking at two things. The first is the tax assessment of the subject property you are considering buying. How much does the county tax office value the property compared to what the bank asks? The second thing I would recommend looking at is www.zillow.com. This is a great site to research recent sales in the neighborhood you are viewing. It will give you the most recent sale price and date. I would look at the most recent sales prices to make a fair valuation of the property in question.
Finding a home that is priced below median home value gives you instant equity in that property. As property values increase, your equity will also increase and your return on investment will also increase. One thing to remember is that you need to do your research to determine if it is a good deal or not. If the property is $20,000 below median home value in the area but needs $45,000 of repairs, obviously not the deal of the century.
If you find a property you really like that is a “pre-foreclosure” property, you and your real estate agent may work through a short sale. This is a process in which a formal offer is submitted to the bank and is subject to bank approval. Basically, the buyer is saying “I’m willing to pay you $100,000 for this property even though the outstanding mortgage is $130,000.” Usually the mortgage is already in default and the bank has to make a financial decision to cut the loss now, accept their offer and move on or if they want to foreclose on that property and own it until it sells. Banks typically spend $25,000 or more on each foreclosure they have. There are many short sale offers out there and working with a licensed real estate professional can help you because most of this information is on the MLS.
3. You’re Approved!: If you’re really serious about getting a foreclosed property, you need to line up financing right away before your search. When you find the perfect home you want, you need to act immediately. Having secured financing or cash on hand will ensure deals don’t slip through your fingers. The real deals just won’t last. I’ve seen deals come off the market within 12 hours of being listed because someone had already worked out the financing element and was able to secure the deal.
It’s also important to secure your financing because some lenders may not work with distressed properties. You may need to find a mortgage broker or company that specializes in distressed properties or use creative financing. I know of clients who use their 401K to purchase distressed properties that are now rental units to them and will sell once prices start to rise again.
4. You are safe!: When it comes to foreclosed properties, it is essential to have them inspected, even if it is a new house. People who have trouble making their mortgage payments typically don’t spend money on maintenance. Foreclosed properties are sold “as is,” so it’s especially important to know what you’re buying, what repairs need to be done, and any other issues, such as foundation or roof issues. You can still decide to buy the property even if some minor repairs are needed; It all depends on how you use the house and your budget.
Use a qualified home inspector and go over the report with them in detail. Find out their expert opinion regarding necessary repairs. I also recommend that the inspection include a termite inspection as well. Some inspections include this automatically and in some states it is a separate work order. Find out what your lender requires for the purchase as well.
5. The Appraisal Process – Your lender will request that a licensed real estate appraiser perform an actual appraisal. If your real estate agent has done a great job on Comparative Market Analysis (CMA), then you should be in the same ballpark as the appraiser. The appraiser is what your lender is using to make sure they have a good investment in this property, as it is the collateral they are lending the money on.
The last piece of advice I will give is to use a licensed real estate agent and broker. Banks, who have much more money than most of us, use it to sell the properties, so it makes sense to use an agent and a broker to buy the property.