10 Tips To Consider When Buying A Foreclosure

If you’re shopping for a foreclosed house that you want to flip, hold your breath until the urge passes. Your checkbook and credit report will thank you. Why is it that people think that they can buy low and yet others will agree to buy high?

But if you’re looking for a home to live in, or one to lease to others for years of positive cash flows, buying a foreclosure might save you some money.

Foreclosed homes typically cost 10% to 15% less than comparable homes in the same neighborhood, even after you’ve made all the needed repairs. Savings of 20% or more are not unheard of.

Just follow our 10 Foreclosure Tips for buying a foreclosure to make sure you get the best deal and avoid costly pitfalls:

Foreclosure Tip 1. Don’t buy at an auction.

In today’s housing market, even experienced auction buyers are getting burned because so many foreclosures are in dreadful condition.

When you buy at an auction, especially the ones they’re holding at your local city hall or courthouse — right on the steps, weather permitting — you usually aren’t allowed to look inside before you bid.

That means it’s impossible to know what shape the home is in until you get the keys. At that point, the house and all of the unexpected costs are yours.

So here’s the one, inviolate rule of buying a foreclosure: Don’t commit to a home you haven’t thoroughly inspected, inside and out.

Foreclosure Tip 2. Buy through a real estate agent.

In many foreclosure auctions, no one bids, or no one bids enough to cover the outstanding mortgage. When that happens, the lender obtains title to the home and becomes responsible for selling it. Those banks or mortgage companies usually hire a real estate agent specially trained to sell what are called real-estate owned, or REO, properties.

Before those homes are put on the market, the lender usually repairs the worst of the damage. You’re also allowed to tour the home so you can see exactly what you’re buying before making an offer.

Foreclosure Tip 3. Take the time to find a buyer’s agent to work for you.

The money will be in the deal either way, so you should have the benefit of an extra set of eys on your side. Be smart on this step. Most agents will work for the same fee, go ahead and find the best.

Foreclosure Tip 4. Know what it will cost to make the home livable.

Good foreclosed homes are merely houses that have sat empty and neglected for months, with dead lawns, peeling paint and other relatively minor problems. Others, however, have been trashed. Some people about to be evicted take their frustrations and anger out on the home. Cabinets and appliances get ripped out. Walls have holes punched in them. Toilets are torn up. Light fixtures are broken, carpeting stained and wooden floors gouged.

Good home inspectors can tell you what’s wrong, but they can’t generally tell you what it will take or how much it will cost to fix something. And many home inspectors feel more loyalty to the real estate agents who recommend them than to the clients who pay them. Inspectors might downplay the damage and underestimate the repair costs. You might call a home inspector every four or five years — if you move that often — but real estate agents call on them all the time. So they don’t want to hit the buyer with really bad news that could louse up a sale.

That’s why you might be better off bringing in a dependable licensed general contractor and asking for a bid to repair everything that is broken. A good contractor has experts to call on for specialty work: plumbing, electrical systems, landscaping, heating and air conditioning and so on. A good contractor also knows that getting the job depends on you, not the real estate agent.

How much you are willing to spend on the house, including making repairs, is a decision that only you can make. But it is part of the financing equation.

Foreclosure Tip 5. Know what the experts say the house is worth.

Your real estate agent will tell you what the home you are looking at sold for the last time it was bought, and what similar — but well-maintained — houses in that neighborhood are selling for now (you can see why you want to take your time in Tip 3).

Foreclosure Tip 6. Determine what the home is worth to you.

Your real estate agent can help you determine the market value, but only you and your family can determine what it is worth to you. Also, you should include the improvements needed in what you are willing  to pay (subtract improvements from market value to determine your offer price). Don’t be tempted to pay more in a bidding war, and don’t be tempted to “low ball” your offer, only to lose a great deal to another buyer who was smart enough to offer an amount for which the home would sell.

Only you can decide what’s right for your family, how much you want a particular home in a particular neighborhood and how much you’re willing to spend.

Foreclosure Tip 7. Bid high.

The whole point of buying a foreclosure is to get a great price, and bidding high might sound stupid, but not when done with knowledge and a plan. So when we recommend bid high, we mean high enough that the bank is scared to lose you as a buyer. Most amateur buyers think “I’ll make a really low offer to see what the bank is willing to do.” Unfortunately, good deals are always competitive, and the bank will be shopping each and every offer. So, determine with your real estate agent what a property is worth and what others most likely will be offering on the home, and you make a (barely) stronger offer.

Take full advantage of three things working in your favor:

• The seller is not emotionally attached to the home and has no irrational expectations about how much it should be worth, thus will consider all (and only) reasonable offers.
• The bank or mortgage company might have a large and ever-growing number of foreclosed homes to get rid of. It’s losing money every day that house sits there, so a strong offer near what they expect to get most likely will yield best results.
• You and your agent can determine (to a very close degree) what a property is really going to sell for. Most other bidders will be low-balling and making your offer look good. Take advantage of good preparation!

Tap your agent’s expertise to determine what your initial offer should be and how to react to a counteroffer. Set a firm maximum price and be prepared to walk away from the table if the lender won’t accept it.

Foreclosure Tip 8. Don’t put all your cash into a down payment.

Make sure you have enough for critical repairs without having to borrow. You don’t have to paint every room or replace every appliance the moment you move in. But you should have more than enough on hand to ensure that the home is secure, with solid doors, windows and locks, and has all of the essentials, such as a working furnace and leak-proof roof.

Foreclosure Tip 9. Arrange buying and refurbishing financing together — in advance.

Depending on how much work the house will need, you might want to consider a 203(k) loan from a lender qualified to fund one.

It allows you to finance the purchase and repairs with one long-term loan. The money comes from a traditional lender, but HUD guarantees it will be repaid, making it easier and cheaper to obtain. You also benefit by getting the second loan at low first-mortgage rates. Fannie Mae has a similar program called HomeStyle that your lender can explain to you.

Whatever you do, start working on your financing as soon as you start looking for a home. Here’s our step-by-step advice for finding the best mortgage with the lowest rates and fewest fees.

Foreclosure Tip 10. If at first you don’t succeed . . .

. . . keep looking.

The number of foreclosures is still climbing, which means this is a great time to be a home buyer, especially if you are willing and able to make the extra effort required to buy a foreclosed home. You can always use the Tampa Florida Distress Property List and all of its daily updates!