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How To Buy Distressed and Foreclosed Properties SUCCESSFULLY!
By: Erika M. Kay, Broker, Certified Foreclosure, Loan Modification, Short Sale & HUD Government Home Sale Professional.
As banks begin to process their housing backlog, experts are expecting a wave of foreclosures to rock the already shaky real-estate market this coming year. Coupled with low interest rates, this could be a great opportunity for homebuyers to pick up a home or an investment property at a great bargain.
According to RealtyTrac, 31% of sales nationwide are of homes in pre-foreclosure or already bank owned--giving buyers many purchasing options if they do their homework.
Buyers have opportunities to purchase a pre-foreclosure or foreclosed (real estate owned (REO) bank-owned) home during different parts of the process.
If a Loan Modification is denied, and prior to foreclosure, some homeowners choose to do a “short sale” which is when the lender agrees to accept a payoff of less than the balance due on the loan. Homeowners must list and advertise the sale as a short sale. If a buyer writes a contract, that contract is contingent on the bank accepting less than what they’re owed. Don’t let the name fool you: The “short sale” process can take three to six months because banks are overwhelmed. Since the time between bid and sale is lengthy, buyers are advised to protect themselves against downside risk from home prices that could decline during this period. To make sure that your offer price reflects possible changes in the market, a fully experienced and sharp REALTOR® will provide you with a Comparable Market Analysis (CMA) for the property of your choice.
With the market swinging from buyer to seller markets, “KNOWLEDGE IS POWER” and you need to fully understand this market dynamic. A highly experienced professional REALTOR® can reasonably “predict” with some certainty what a buyer should pay and a seller should sell a home for.
Buying at Auction
When the homeowner voluntarily gives their keys to the bank in exchange for cancelling the mortgage, banks take possession of homes by a deed in lieu of the foreclosure process. When a bank takes a property from a homeowner involuntarily, the home can be sold at a public auction 90 days later. Bidders can’t view these houses prior to the auction. Buyers won’t know if there’s no air conditioning, cut electrical wires or other vindictive damage that the homeowner did until after the sale. The winning bidder is usually required to put down a $10,000 deposit toward the purchase price and has one day to inspect the inside of the house and decide whether to complete the purchase or forfeit the deposit. A buyer needs enough cash to fund the entire purchase and to rehabilitate the house after close. Purchasing from an auction is the last avenue a buyer should use unless they are seasoned, experienced auction buyers. If the property doesn’t sell at a public auction, the bank takes ownership of the home with the intent of reselling it on the market. Once a property is bank owned (REO), it’s a standard timeframe purchase, and Purchase Offers are accepted or rejected within a few days, and the closing occurs in about 30 to 45 days.”
You Must Know Your Market
A foreclosed property may be a great bargain, but a buyer has to do their homework before making an offer on a foreclosed property When looking for a home in a particular market, Erika Kay broker of Independent Broker Consultants, advises her buyers to research sales prices, the number of foreclosures in the area, school districts, amenities such as restaurants, shops, and the proximity to landmarks like a beach or mountains, all of which impact home values. Every market has some portion of bank-owned homes for sale. “You want to be careful if every house is in foreclosure,” Erika Kay says and she advises borrowers to buy properties in as good a shape as possible that are located in good neighborhoods.
Set Realistic Expectations of What You Can Afford
Before the house-hunting process, buyers should know how much they can afford by getting an approval for a mortgage preferably from a direct lender. Without this letter, a purchase offer will not be considered and you will be wasting your time. If needed, your experienced agent will help and guide you from the beginning of your search to the successful close of escrow. The Department of Housing and Urban Development provides foreclosed-home buyers with options outside of a traditional mortgage. The Federal Housing Administration (FHA Section 203(k) program is great for foreclosed home buyers. Section 203(k) loans are funded by private lenders and insured by HUD, with borrowers able to use a portion of the loan to rehabilitate an owner-occupied house. The down payments for these loans are 3.5% of the purchase price instead of the traditional 20% down payment for a mortgage without insurance. When a house requires repairs, buyers can borrow up to an additional 10% of the house value, as determined by appraisals and estimates, to fund these costs, according to HUD guidelines. You need contractors to bid on the house, and these bids are given to the appraiser who provides a value of the house before and after its rehabilitated. If you found a great bargain but it needs repairs, the FHA loan gives you more money to help fix up the property.
Decide What You Can Handle
Foreclosures (REO’s) aren’t always listed for sale right after the Trustee Sale and can be neglected and empty for a long time. Buyers should start looking at those listed on the market by Realtors. Due to low inventory in some markets and low interest rates, these properties are receiving multiple offers, many exceed the asking price.
An Inspection is a MUST
“Short Sales” aside, buying a bank-owned home and a home owned by a “Standard” regular seller is not very different. The difference lies with the fact that banks aren’t in the business of fixing things. Experts advise that buyers of foreclosed properties ask for a home inspection, however, most banks refuse and you are buying the property in an “As Is” condition. Getting a home inspection is not a requirement, but you should get one even if you have to pay for it yourself. No one wants surprises on the last day. In regards to termite inspections a lender requires a termite inspection to check for physical damage from termites and a flood certification that determines whether the buyer needs federal flood insurance when the house is in a floodplain, but these are different than a home inspection. When a vacant home’s utilities are turned off, experts recommend asking that utilities be turned back on for the day of the home inspection so that inspectors can functionally test the heating, cooling and plumbing. Every day that a home is vacant and utilities are turned off, “the systems of the house begin to degrade,” experts say. “You can’t determine this until everything is turned back on” they say.
Since buying a home in this present market may have extra complications, experts advise buyers to be patient. In this market with increased foreclosures, “buyers will still have the upper hand,” they say. You can afford to be patient and wait for a property and opportunity that’s best for you and not settle for something “just to buy quickly”.
I am here to help you and I will guide you and answer your questions during my upcoming important Buyers and Sellers Workshops. For more information please contact me at my office 951-734-6447 or Email: email@example.com. I will be looking forward to your important contact.
Erika M. Kay, Broker/Owner, Property Manager
Short Sale & Foreclosure Specialist (NARSFR)
SRES (Senior Real Estate Specialist)
Independent Broker Consultants
1655 E 6th St. Ste A-1, Corona, CA, 92879
Office: 951-734-6447 - Direct: 951-545-3786
E-mail: firstname.lastname@example.org - Website: www.ErikaKay.com
CAL BRE #008047509