Foreclosures: Rent or Buy?

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Finding and Buying Foreclosures

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Rent or Buy Foreclosure?

My name is Sandy and recently my husband and I were told we have 90 days notice to leave the home we've been renting for seven years. The landlord was good to us and rarely raised the rent. The amount we've been renting is currently below the market. It will be a struggle to look for a new home, in today's rates, affordable for a family of four.

In the process of looking, I have been coming across ads that say how it is a foreclosure market at this time. "Don't rent, buy in at reduced rates with a foreclosure." In the county I live at in California, I know things have slowed down quite a bit, but I also know there is a potential for fraud. I also know that in our area that a considerable amount for a deposit is needed on a rental. The first, last, and a deposit can equal $5,000 and up. That sounds more like a deposit for purchasing, not renting. The rumor is that those that couldn't sell their homes are renting them out and collecting high deposits to make up for back payments. Either way, this is going to be a struggle.

Is it possible to buy into a foreclosure that would be a good investment, and if so, what do we watch out for? We used to own a home and sold at the start of the trend of raising prices due to a financial situation and a premature infant. Those hard times passed, and we were happy in our sweet rental home. But the home belongs to another. I would just not want to go through this again if there was truly a way to get back to homeownership we could handle. Thank you for any advice!
Sandy C. in California

Before Buying Qualify for Mortgage

You have heard that it is a buyer's market, and that is very true. What makes it a buyer's market is that there are more houses for sale than there are buyers. Unfortunately, one of the things that limit the number of buyers is that people can't necessarily qualify for loans. Even with continued low interest rates, the other restrictions (like needing a down payment) are disqualifying many folks since the banks have had to tighten up restrictions to avoid losing any more money.

If you are in a position to buy, that's great. Qualifying for a mortgage is your first order of business. You have a short window, based on your message, so you'll need to get started as soon as possible. If you're not experienced in real estate, I recommend you find a licensed agent to help you find a property. It's not necessarily going to net you the lowest price on a property (since the seller will be paying a hefty commission), but you have time constraints, so it's time to bring in the pros. Ideally, you want to enlist the services of an "Accredited Buyer Representative." You need the agent representing you. If you don't have a contract to that effect, the agent actually represents the sellers.

Aside from buying a house outright, other ways to go are with a "rent to own option" or a "lease option." It's a very good way for some folks to start because you don't have to come up with nearly as much cash (for a down payment). Keep in mind, when it comes time to actually buy the home, you are generally still going to have to be able to qualify for a traditional mortgage. On the plus side, you will have already paid some of the required down payment. But you'll have to consider whether you'll be in position to qualify in three years (the typical option term). In some cases, the owner is going to hold the note on the house, but that generally requires them to own it outright. One of the pitfalls of these options is if for some reason you can't purchase the home when it comes time for you to exercise your option, all that extra money you paid is lost.

Foreclosures can offer some great deals, but I highly discourage you from buying one at an auction. You generally don't get to inspect the property beforehand.

Another option is to contact a local real estate investment organization and talk to some of the more experienced members. There are a lot of investors doing what are called "short sales." These folks are negotiating with the banks on houses in default to purchase them before they are actually foreclosed on, and are able to buy them at very low prices (the banks lose a lot of money on houses that are foreclosed on). At any given time, in my area, there are a dozen or more investors who are set to close on short sale contracts and will be turning around and reselling the property below market value. They sell low because they need to unload the property quickly to limit their carrying costs and maintain their profit. The nice part about these properties is that all debts and liens against the property have to be paid off in order to close.

Whatever you do, before you sign anything, make sure to have a real estate attorney look at the contract.

In regards to renting, be sure to investigate rental laws that apply in the county where you live. California has fairly strict limits on how much and what kinds of deposits can be required.

Ask the Professionals

I was a realtor in the past, but not now. My first home was bought when I was 22 years old, prior to my marriage, with $100 down and $100 a month. It increased in value and I sold it for three times what I paid for it. That was eight years into the mortgage.

In the Upstate of SC where I live, homes are selling much below market value. One foreclosure that I heard of recently on TV was in a $1 Million + community. The home sold for $350,000 and was sold in four days. I'd say that it is in your best interest to buy a home especially with the rents and deposits you mention in your area. As the saying goes, it is now "A Buyer's Market."

There are loans for first time buyers and many other programs to help you get into a home. Ask the realtors in your area. Just this week, I saw an article on the Internet about programs to help with down payments. Search the Internet for information in addition to asking local realtors. They are ready to help, as they will make a commission when you buy a home.

I feel it was a wise decision to become a homeowner at the tender age of 22. I always feel it is better to be a homeowner rather than a renter. I'm a senior on a fixed income and my home is paid off.

Food for Thought

We just bought a house that allows us to live in the upstairs and rent out the basement. The renter helps us with our mortgage payments, and when we don't need a renter anymore, we can increase our living space or sell the home as an investment property. You just have to look for a place that will be comfortable for both the upstairs and downstairs families to live in such close proximity. We sound proofed between the two floors and the basement is a walk-out basement so the people living in the basement get a lot of light in their living space too.

Consider Bankruptcy Sales

There are some good foreclosures to be found; however, in some states (if not all), realize that others have thirty days to upset the bid with foreclosures. Theoretically, this could go on forever. Another option is bankruptcy. At a bankruptcy sale, there is no upset period, and the transaction is completed more quickly than with foreclosure. My husband and I bought our 4000-square-foot home and 16 acres for about 25% of its appraised value at a bankruptcy sale.

Build Equity

First off, if you can get a mortgage and house within the payment range of what you've been spending for rent, why would you want to continue to pay for someone else's investment? The rent you pay could be building equity in your own real estate.

The first step should be to find yourself a good realtor to represent your best interests. It costs the buyer nothing to use a realtor, as the seller or bank pays their fees. Look for an aggressive agent who will be good at negotiating the best price for you. If you are not represented and you are looking to buy foreclosure property, beware. You could end up with someone else's liens on that property if you are not careful. Also, in a lot of cases, bank properties need work. If the homeowner could not afford to keep up on their payments, chances are they didn't have the money to keep up on the upkeep of the home either. If you are handy and the fix-ups are mostly cosmetic, it's called "sweat equity."

For loans, use caution there as well. I would caution against adjustable rates. Although everyone thinks they will be in a better spot in two to three years when the rate could go up, we rarely are. That's why there are so many foreclosures. Unless you know for sure that your income is going to increase considerably, get a fixed rate. Also, look into government backed loans. They are the best things going out there right now. Those are FHA and VA. VA is the best loan for anyone who has served in the military and they don't require a down payment. There is also grant money available. That is money you can use for your down payment or closing costs. You can also ask for "seller concessions" for down payment or closing costs. A good realtor can explain how that works. Find yourself a good loan officer who can outline them all and then make the decision based on what is best for you. Your realtor should be able to give you names of reputable mortgage companies as well. The best to time to buy is when the real estate market is down in your area. Real estate always rebounds, and when it does, you will be amazed at how much equity you will realize in your home.

Insider Report: Finding a Reputable Loan Officer

Yes, you can purchase. First, get a copy of your credit report and check for accuracy. If there are problems, get started on fixing them right away. Next, ask around your circle of friends and co-workers about which loan officer they recommend. A company/loan officer with a good reputation will take care of you; don't just go for whoever is advertising the best rate (while sacrificing service and potentially getting a really bad deal). Since you have not owned in the past three years, you qualify for a first time buyer loan. Many of these loans have low to no down payment, low fixed interest rates and are very safe. Ask about Down Payment Assistance in your area; these low rate deferred loans from the City or County can really help you get an affordable payment. Once the loan details have been figured out, it's time to find a realtor. Again, ask for referrals. Your loan agent probably has someone he/she works with and trusts; just ask.

Buying foreclosures need not be any more difficult or risky than buying any other home. When you find a home you like, make sure to get a home inspection. A home inspector will go through the entire house looking for any problems and come back with a written report. The money spent is well worth it and can alert you to items that need attention. You should also get a pest inspection, also known as a termite inspection, to further check for costly unseen damage and damage in the making. Your realtor will help you coordinate these inspections. A few extra checks in the beginning can ensure that you are getting the dream home you desire.

Take your time, ask lots of questions, and make sure you fully understand everything. With the right steps, you soon could be living in an affordable, wonderful home of your own.
Tiffiny, Loan Officer
Redding, CA

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