So You’ve Decided to Buy a Foreclosure

5  tips for buying a foreclosed home

By Holden  Lewis • Bankrate.com

 

Buying a foreclosed home is a little different from buying a typical  resale.

In many cases, only one real estate agent is  involved. The seller wants a preapproval letter from a lender before accepting  an offer. There often is little, if any, room for negotiation. The home comes as  is, and it’s up to the buyer to pay for repairs.

On the upside, most bank-owned homes are vacant, which can speed up the  process of moving in.

“Buying a foreclosure is definitely a bit of a grind. It’s not easy,” says  Robert Jenson, owner and founder of the Jenson Group at RE/MAX Central in Las  Vegas. “You’re getting fantastic pricing, but sometimes it takes going through a  lot of houses and writing a lot of offers to get the home you want.”

In Jenson’s stomping grounds of Las Vegas and surrounding Clark County, the  housing bust hit hard, and upward of 80 percent of homes sold are “distressed  properties” — foreclosures and short sales. (A short sale  happens when the lender agrees to let the owner sell the house for less than the  amount owed because the owner can’t afford the monthly payments.)

Nationwide, about one-third of sales in May were of distressed properties. A  big chunk of those sales went to first-time buyers, according to Lawrence Yun,  chief economist for the National Association of Realtors. “First-time buyers are  concentrated in the lower price ranges, which include most of the distressed  sales,” Yun says.

Before you begin the house hunt

The first two steps in buying a  foreclosure should happen almost simultaneously: Find a real estate broker who  works directly with banks that own foreclosed homes and get a preapproval from a  lender.

5 steps to buying a distressed property
  1. Get preapproved for a mortgage.
  2. Find an agent specializing in foreclosures.
  3. Know how long it takes to sell a home in your price bracket.
  4. Study the sale prices of comparable homes in your area.
  5. Remember the sale is for the home as is.

Elaine Zimmerman, a Memphis real estate investor and author, recommends that  shoppers first visit the Web site she owns, ForeclosuresUS.com, or any site with  a database of foreclosed homes. You also could look at a local real estate Web  site that lets you filter the results to see only foreclosures. You might find  the acronym REO, which means “real estate owned” (owned by a bank, that is).  This signifies that a home has been through foreclosure and the lender is  selling it.

The goal of combing through foreclosure listings is not to find a house; it’s  to find an agent. Banks usually hire one or a few real estate brokers to handle  their REO properties in a market. In a lot of cases, the buyer works directly  with the bank’s broker instead of using a buyer’s agent. That way, the  commission doesn’t have to be split between two brokers.

“A lot of these Realtors have a long-term relationship with these banks, and  they know of listings that haven’t even come on the list yet,” Zimmerman says.  “Call them about the listings that you’re interested in, but also ask them about  listings that may be coming up because sometimes it may take a day or two or  even a week before a listing actually comes onto the database.”

Such a request might not always pan out. In places such as Las Vegas, where  thousands of foreclosed properties are for sale, you might not get much  one-on-one attention from overloaded agents. To prove that you’re serious about  buying, says Jenson, “right before or after you meet with the agent, meet with  the lender.”

Unless you plan to pay cash, you’ll need a recent preapproval letter from a  lender. The letter will describe how much money you can borrow, based upon the  lender’s assessment of your credit score and income.

“The problem is buyers want to find the house first, and then they think  they’ll work out the financing,” Jenson says. “But the problem is the really  good deals on these bank-owned, they go quick — and the buyer doesn’t  necessarily have time to try to work out the financing afterward. They need to  work that out first.”

Zimmerman says some first-time  buyers make the mistake of assuming that the bank selling the home will also  finance the mortgage as part of the deal. “Don’t expect to get financing from  the bank that foreclosed on it,” she says. “That’s a totally separate  transaction, and they view it that way. The people in the (bank’s) REO  department are not loan officers. They are getting rid of bad assets.”

Pricing is not a slam-dunk

There’s no rule of thumb on what the  bank’s bottom line is on price. Just as with any other real-estate purchase, you  have to look at the recent sales prices of comparable properties, or  “comps.”

Jenson says: “You really have to look at the comps in today’s current market  conditions and write a competitive offer based on that. Sometimes the bank  prices the homes really low, and the home will have multiple offers over list  price within hours. Sometimes it’s priced too high, and you can come in lower. A  lot of times, buyers will come to me and say, ‘We want to write offers for half  price.’ It just doesn’t work that way.”

Keep in mind that foreclosed houses generally are sold as is. That means that  you shouldn’t expect to get a discount to compensate for repairs. Jenson says:  “Let’s say the house is listed for $200,000, all the comps are $200,000, and so  the client comes in and says, ‘Hey, look, I want to buy this house but I’ve got  to do paint, carpet and fix some mold damage, so I want to take $15,000 off the  price.’ You know what? All the other ones were in the same condition, and they  sold for $200,000.”

Jenson further counsels to look at the “absorption rate for your product  class.” After apologizing for getting “too fancy,” he explains that he means you  should find out how quickly comparable houses are selling. In foreclosure, a  3,500-square-foot house with a pool in a gated community might sell within days  or hours, whereas more modest homes might sit on the market for weeks. Or vice  versa, depending on market conditions.

If homes in your product class are selling swiftly, “the best advice on a  bank-owned property is to come in at your highest and best, unless the property  has been sitting on the market forever with no activity,” Jenson says. “If  you’re going to be upset because you would have gone $5,000 more, but you lost  the property, just bid the higher price in the first place.”

Because repairs are almost inevitable with foreclosed houses, Jenson and  Zimmerman recommend getting to know tradespeople who can assess and repair  damage from pests, mold and leaks. Zimmerman says you should assume that the air  conditioning needs to be fixed, and possibly the heating system, too.

It all sounds daunting. But at least you don’t have to wait for the owner to  move out of the house.

 

 

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About Ryan&Real Estate

Born and raised in Fort Worth, after graduating high school I began my quest for self-employment. I started out in Cosmetology. Learning how to wrap, perm, color and cut. I began practicing, but with the crash of the economy my family and I had to move and I had to leave my beloved clients. After the slow rise of normalcy in day-to-day life, a career in real Estate fell in my lap. As I begin my new life as an agent, I'm constantly searching for more and more information, and what better way to share my findings, than by blogging about it? Enjoy!
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