How to buy a foreclosed home
Buying foreclosed homes: Opportunity knocks, but it can also knock you down
If you're looking to buy a foreclosed home, for yourself or to fix and flip, here’s a key tip. Make like a Boy Scout, and be prepared! Thoroughly research the local market, the purchasing process and the players.
And above all, set your expectations to realistic.Verify your new rate (Feb 21st, 2018)
The bargain basement is pretty empty these days
If you think foreclosed homes are underpriced “rough diamond” mines just waiting to be tapped, you’re likely to be disappointed.
Ten years ago, many foreclosed homes sold for 18 percent to 59 percent less than comparable non-foreclosures. Today, foreclosed homes sell for about 5 percent below non-foreclosures in the same market and location.
On the upside, many bank-owned homes today are in better condition than those of yesteryear. Thanks to the improved housing market, you’ll see fewer broken-down, hollowed-out shells.
So how can you spot a bargain – and then buy one?
Find agents who specialize in buying foreclosed homes
To start, research people as well as properties. Buyers often find bargains by first finding agents who know where the bargains are. Search for brokers and selling agents who’ve been hired by the banks to market foreclosed homes.
Note: foreclosed homes are also called real estate owned (REO) properties.
Many of these agents are specialists. All they do is sell foreclosed homes, often for discounted commissions because they sell them in volume. At the same time, seek websites that feature databases of foreclosed homes, as well as local real estate sites with foreclosure property sections.
Don't forget HUD foreclosures
One of the first places you should look to buy foreclosed homes is HUD's website. It lists foreclosure homes owned by HUD (FHA loans), the VA, the IRS, USDA and other agencies. HUDHomeStore.com, for example, lets you search within your state for its foreclosure properties. It gives those who want to live in their home a head start over investors, often only allowing owner-occupiers to bid for a number of days before opening up bidding to other buyers.
You need to be represented by a licensed real estate agent to bid on one of these properties. There's a bonus -- not only do you get a (possibly) under-priced property, if you're a first responder or teacher, you may be able to get that home for half price and put just $100 down.
In most cases, you will only interact with the bank’s agent, not the bank. For that reason (and others), it’s a good idea to hire a buyer’s agent to protect your interests.
Unless you have experience buying foreclosed properties, your agent should be a veteran in this market.
Get Pre-approved for a mortgage
Today, foreclosed homes in fairly good condition and prime locations are rare gems. In other words, they usually sell fast. To beat the competition, you’ll need financing in place before you start shopping – unless you plan to pay cash. If you have the money, you can pay cash now and refinance later to get (most of) your money back, if you choose.
Get a pre-approval letter from one or more mortgage lenders – not just a pre-qualification letter. Pre-approval involves actually applying for a mortgage and submitting the documents underwriters need to commit to a mortgage approval. Pre-qualification might not even involve checking your credit score and only asking you to estimate your income.
A pre-approval letter confirms that you will be able to borrow X amount based on that lender’s evaluation of your credit score, assets and income. With pre-qualification, the lender is merely estimating how much you could borrow. It is not committing to such a loan.
Don’t assume that the bank that owns the home will lend you money to buy it. Many banks will have you complete a mortgage application or otherwise evaluate your finances. (They don’t want another foreclosure on their hands.) But that doesn’t mean they’ll give you a mortgage.
A bank’s REO department is in charge of disposing of bad assets, not issuing mortgages. Buying a foreclosed home and financing the purchase are two separate transactions.
Negotiate a price
Before making an offer, you and your agent should assess the local market. Consider the home’s condition, location and the prices for which comparable properties (“comps”) have recently sold.
In addition, you may want to determine the absorption rate – the speed at which comps are selling. If prime properties are selling in just days, your offer may need to be as sweet as high-fructose corn syrup.
Expect the bank to demand you purchase your foreclosure property “as-is.” Expect it will want to use its own title company or real estate attorney. And you'll need to provide proof of funds and/or a mortgage pre-approval letter with your offer.
You can negotiate several most common items: price, costs, property inspection, and the closing date.
Don’t expect a price discount for any repairs you may need to make. Unlike 10 years ago, most banks are not desperate to sell REOs. Instead, they are seeking to maximize sale proceeds -- the net. With your offer, your real estate should be willing and able to prepare and submit a "net sheet," which includes all closing costs, who pays what, and how much the bank will ultimately net at closing.
You can try playing hardball if a property has been on the market for (say) 30+ days. But if a foreclosed house doesn’t sell fast, it’s probably for good reason.
Get a home inspection
Always get a home inspection before making an offer. When you buy a foreclosure, you’re taking the property “as is.” Also, always make your offer contingent on satisfactory results from the inspection. This doesn’t mean the house won’t need some work. It probably will.
You just don’t want to buy a house and later discover that the furnace hasn’t had any maintenance since the Nixon Administration.
(Speaking of unpleasant surprises, title insurance is a must when buying a foreclosed home. Don’t assume that the title has been fully searched and cleared by the seller or lender.)
Working with the home inspector and/or a local contractor, develop a repair estimate. Then use that figure to help formulate an offer that is both realistic and competitive.
Financing a foreclosed home purchase
If your “dream foreclosure’ is in livable condition, and lenders consider you a good risk, you may qualify for a conventional mortgage. Financing problem solved.
However, if the house requires heavy-duty TLC, an FHA 203k loan may be your best option.
The FHA 203k allows you to borrow for both the home purchase and repairs using just one loan.
Because these loans are guaranteed by the FHA, it’s easier to get approved, even with a credit score as low as 580. The minimum down payment is just 3.5 percent. However, these relaxed financial standards are offset by strict eligibility guidelines. The house must be a primary residence, and renovations can’t include anything the FHA deems a “luxury.”
Fannie Mae offers a similar home purchase and renovation loan – the Fannie Mae HomeStyle® program. Compared to the 203k, its eligibility and costs are more palatable. However, it has stricter down payment and credit score criteria.
Because of the paperwork involved, and a requirement that you use only licensed contractors, neither type of loan is suitable for minor repair projects. Although foreclosed homes are not as abundant or inexpensive as they once were, good deals can still be found. You simply need to know where to look – or hire someone who does.
Just be prepared to strike the moment you uncover a real bargain.
What are today's mortgage rates?
Today's mortgage rates are trending higher. You can offset this somewhat by shopping aggressively for the best deal among several competing mortgage providers. It's a proven strategy, according to several studies. However, you may want to get pre-approved for a loan at a slightly higher interest rate -- you don't want your approval to expire if rates rise just as you locate the perfect property.Verify your new rate (Feb 21st, 2018)
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