5 steps to buying a foreclosure
Potential for a great bargain is there, but you have to know what you're getting into.
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With more than 1 million U.S. homes in some phase of foreclosure, great deals abound — if you know how to separate the wheat from the chaff.
"The No. 1 reason to buy a foreclosure is the potential for a good bargain," says Daren Blomquist of RealtyTrac.com, which follows the U.S. foreclosure market. "Distressed properties have always come with a built-in discount, even before today's foreclosure crisis." (Bing: What's a short sale?)
Bank-owned properties, or homes that lenders have seized through foreclosure and have put up for sale, often sell for even less.
"Foreclosures might not be for every buyer, but we believe they represent a great opportunity for many buyers," Blomquist says. Still, he recommends that would-be buyers tread carefully. Foreclosed homes typically are sold "as is," even though many fell into disrepair as their former owners struggled with money troubles. Some former homeowners also damage their homes on their way out the door. Other properties sit vacant for months or years, attracting vandals or falling further into decay.
How can you tell the good from the bad and the ugly? Here are five things that Blomquist says smart foreclosure buyers should always do:
No. 1: Focus on REOs if you're a novice
Inexperienced buyers should probably steer clear of foreclosure auctions and possibly even short sales, focusing instead on real estate owned properties, or REOs, Blomquist says.
Short sales can involve lengthy negotiations with lenders for approval, while foreclosure auctions require all-cash payments. You also can't inspect a home that's facing foreclosure auction, because its current residents still own the property and don't have to let you in.
By contrast, REO deals are very similar to traditional home sales. Lenders typically hire real-estate agents to show REO properties to would-be buyers, and also allow home inspections and the use of mortgages to finance purchases.
At the same time, REOs generally offer the lowest prices of any distressed properties. Blomquist says that they're often in the poorest condition and that banks frequently discount them heavily to promote a quick sale.
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"A bank isn't emotionally attached to a REO — it's just looking to recoup as much of its losses as possible," he says. "So the lender is often more willing to capitulate on price."
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No. 2: Inspect properties carefully
Assuming you follow Tip No. 1, you can have the home professionally inspected. That's key, because most short sales and REOs are sold "as is," even though their financially strapped former homeowners rarely kept up with the maintenance.
Blomquist recommends having a good home inspector go over any foreclosure you're thinking about buying. Then present the seller with a list of all problems and estimates of how much they'll cost to fix, using this rundown as a tool to negotiate a lower price.
No. 3: Set up financing in advance
Blomquist says many short sales and REOs attract multiple offers, so you should set up financing in advance.
"Having your financing in order in advance is crucial," he says.
He recommends getting preapproved for a loan before looking at properties. You should also check your credit score, fix any credit problems and set aside enough cash for a down payment.
No. 4: Hire a good buyers agent
"An experienced buyers agent — particularly one who's familiar with foreclosures — can really help you navigate the process," Blomquist says.
The National Association of Realtors offers a Short Sales & Foreclosure Resource certification to agents who take a special class on the subject. Similarly, the private Charfen Institute provides class work leading to a Certified Distressed Property Expert designation.
No. 5: Research your market
Study your local foreclosure scene carefully and understand how much properties are selling for, how quickly they're moving and how much a distressed home's value will likely rise.
"It's important to not make the mistake of counting on any major price appreciation in the near term," Blomquist says. "We're still in a depressed market, and we're probably not going to see home prices appreciate much for quite some time."
how to win a foreclosure you are foreclosed on by the bank for 450,000 you file bankruptcy then when the auction of property occurs have your married daughter bid on it for 90,0000 you win all the way around the poor saps paying their mortgages absorb the banks lossess
Most of what this article says is pretty much common sense. Anyone who thinks that buying a property that has been foreclosed is going to walk into a livable dwelling is dreaming. As it says if it is a foreclosure the former residents may still be residing in it and not very happy about their circumstances so if you are lucky all they will do is neglect the place. Some will damage things and steal fixtures out of spite. My sons are doing this as a long term investment and one home they looked at had no toilets, sinks, or water heater. The previous residents had gutted it as much as they could.
They typically assume that in order to rent the place they are going to have to replace most if not all of the mechanicals. That includes plumbing fixtures, furnace and A/C if applicable, hot water heater, and also acquire useable kitchen appliances. They factor that in before even looking at the property in many cases. Their most recent acquisition was a house that had been last appraised for $40,000.00 but had been owned by the bank for over a year because of its poor condition. They got it for $6,800.00 cash. So far they have replaced the furnace, A/C, doors and window, appliances, the water heater, and are now down to just cleaning and painting.
Their loan cost is minimal due to the fact that they paid cash. Right now they only pay into an escrow account for insurance and property taxes and are paying some small credit fees for the cost of materials and labor that were charged on a credit account. The total amounts to about $350.00 per month and they expect to rent it for around $900.00 per month. The credit charges should pay off within the first year of rental and after that their rental income will be almost 90% positive cash flow with only insurance and property taxes coming out of that. They are also smart enough to put a substantial part of the positive cash flow into a separate account for any maintenance issues that may arise and/or for renovation and down time when renters vacate. It may take a few months to re-rent a property so you have to be prepared to absorb that period of no rental income.
Simply put it is not a simple cut and dry proposition when you look into buying bank owned or foreclosed property. There are a lot of considerations that this article really doesn't cover that come into play like any past liens, lead paint or asbestos issues, or past drug manufacturing contaminants. You have to pay for a title search to protect yourself even when buying these properties and that can be several hundred dollars up front along with any inspection fees if you don't do your own inspections. The best caveat is to simply remember to do all of your homework before you pay that first penny toward a distressed property. Know as much as you can before you even make an offer.
Put dates at the top of the article!! I find most of the info in the Real Estate section is not useful and inaccurate due to obsolete information!