By Stacey L. Bradford,
Associate Editor, SmartMoney.com
RIGHT NOW, IT’S anyone’s guess when the housing downturn will finally hit bottom. But if you’re looking to buy a home now – and plan to stay in it for a while – there are plenty of bargains to be had on a foreclosed property.
Banks are often willing to sell foreclosed homes for up to 20% below market value just to get these troubled properties off their books, says Rick Sharga, vice president of marketing for RealtyTrac, a web site that lists foreclosed properties. With foreclosures at an all-time high in the past year, there’s no shortage of these opportunities to pursue. However, prospective buyers should know that closing on that super-cheap distressed home is often a lot more complicated and risky than buying a home that doesn’t have all of that financial baggage.
Here are five things you should know before you buy a foreclosed home.
1. Finding Properties in Foreclosure
Thanks to the Internet, it’s easier than ever to find homes in foreclosure. For a monthly fee of up to $50 you can surf web sites like Foreclosure.com and RealtyTrac, which list thousands of properties.
The biggest bargains can be found in areas where there’s a large concentration of distressed properties. The banks with the most exposure to these areas are typically the most motivated to cut a deal since they don’t want to get stuck with a glut of real estate they can’t unload, says RealtyTrac’s Sharga. But before you snap up the cheapest home you can find, make sure to do some research. Find out if the property is located in a decent neighborhood with good schools and healthy employment rates. (Local real estate web sites are a great place to start your research.) If you buy in an area that’s losing jobs and is riddled with crime, home values are likely to take a lot longer to recover.
2. Avoid Auctions
While there are a number of safe ways to buy a foreclosed property, bidding on one at a court auction isn’t one of them. That’s because you’re buying a home sight unseen and without an inspection, warns Sharga. You’ll have no idea whether the home needs repairs and how much they might cost. Some of these properties also owe back taxes, a headache that’s transferred to the new owner. And finally, in most cases, you’ll need to pay cash for the home.
The least risky way to buy a foreclosed home is to wait until the bank has put it back onto the real estate market. These properties are called bank-owned or real estate-owned (REO). Before a bank hangs a “For Sale” sign, it pays off all the existing debts and taxes, and in many cases, repairs the home to bring it up to the standards of the neighborhood. Best of all, you should be able to buy a bank-owned property with a traditional mortgage.
Read our story for more on buying a home at auction.
3. Research Home Values
Just because a home is being sold by the bank, doesn’t necessarily mean it’s a bargain. Home prices have fallen dramatically from their peaks in 2006, a time when loose-lending practices allowed people of all credit ranks to easily obtain mortgages. Now, many homeowners going through the foreclosure process owe more on the mortgage than their property is actually worth. To make sure you aren’t assuming an overpriced loan, research home values in the area. That way, you’ll be better able to identify potential deals.
If you fall in love with a home in preforeclosure that’s overpriced, then you can see if the bank will allow a short sale. This is when the bank accepts less for the home than the amount owed on the mortgage. While not an ideal scenario, accepting a lower price is often in the bank’s best interest. Banks typically spend $25,000 to $50,000 during the foreclosure process. On top of that, they typically end up reducing a home’s asking price to match current market values, says Sharga.
4. Line Up Financing First
While it’s always a good idea to get preapproved for a mortgage before you start shopping for a home, it’s even more critical when you’re shopping for foreclosed properties. Even if you have stellar credit, some lenders won’t make a loan on a distressed property, says Andy Tolbert, a Sanford, Fla.-based real estate investor who specializes in foreclosed properties. Other lenders will only offer a mortgage if the house is in decent condition.
If your loan officer is willing to make a loan on a foreclosed property, find out what criteria the home needs to meet in order to qualify for a mortgage. You can expect the lender to allow cosmetic repairs, but be unforgiving of termites and other serious fixes, says Tolbert.
5. Get It Inspected
Even if a home is brand new you want to get it inspected. But inspections are especially important when you’re dealing with homes in foreclosure. When people have trouble paying their bills, they typically put off the regular maintenance on their homes, says Glen Daniels, a director with Foreclosure.com. Once a home is seized by a bank, it then sits vacant and falls even further into disrepair. In a worst-case scenario, a homeowner could be so angry he lost his home that he actively destroys a property before he moves out. Without an inspection, you won’t be able to estimate the cost for repairs or be able to report the home’s true condition to your lender.
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