Are Foreclosures a Good Deal?
Should We Consider Foreclosures?
My husband and I have recently moved to a new area and are temporarily renting until we can make a wise investment decision on a home purchase. We know the value of buying and selling real estate wisely, and are therefore carefully researching the area to be ready at a moment's notice to pounce on a deal.
But - I'm very curious about foreclosed homes. I'd like to ask if there's anyone out there who has experience in buying foreclosures. What's involved? How do I get in the loop to hear about them? Are there any red flags I should be aware of? How does financing work?
Consider Auctions, Too
I spoke to a courthouse employee several weeks ago regarding foreclosure and tax lien sales. What he told me is that in foreclosures, the lender purchases the home 99.9% of the time. They will then list with a local real estate agent in order to recover their loss.
You should probably consult a professional regarding tax lien sales. It was my understanding that after 3 years of unpaid taxes, the county offers the property at the courthouse steps to the highest bidder. The people who are losing the property can reclaim it within 2 years of the auction date by paying the delinquent taxes. You are not entitled to any compensation for repairs, improvements, etc. you performed on the property. After 2 years you can get a deed to the property. The courthouse employee used this scenario regarding tax lien sales.....you buy a house and it needs a new roof. You better wait 2 years before fixing it or else there's a good chance you're fixing up someone else's house.
I think a better chance to get good deals is to go to auctions where the real estate is also being offered. Do your homework on the local market, what's selling, what's included, etc. Do inspect the house thoroughly. Check the plumbing, the electrical, the floor joists, look up in the attic. Don't be intimidated by the number of people at the auction talking about the property....it's safe to say 90% are just curious, 5% might be interested if it doesn't go too high and the other 5% are serious. If you have 100 people at the auction, it's between you and 4 others! Don't get caught up in auction-fever. I am aware of a house in my area purchased at auction for $42K and its appraised value was $67K.
Our FHA Repo
We bought our house as an FHA repossession 5 years ago. Here in Indianapolis, the properties are listed in the Sunday newspaper's Real Estate section, with a suggested price based on appraisal (usually this is the appraised figure). It is a closed bidding process, which means that you submit your offer, through your realtor, to the FHA board. They only open the bids on the day of the sale, and the best offer takes the property. FHA pays most of the closing costs.
Most of these homes need some work, as they've been abandoned by the owners or abused. We faced pipes that had burst with a winter freeze and LOTS of cosmetic work (carpet, paint, etc.). Sometimes you will even find a furnace missing! But you can usually get a great deal if you find the right property for you. We only spent about $5k fixing our house up (and the house was liveable when we took possession); we could probably get close to $30K in profit if we were to sell it. And I would not necessarily consider this house a "fixer-upper," as it didn't need any major construction work done.
Another place to check is the Veteran's Administration, which also lists foreclosed homes, and often you can find homes being auctioned by the Sheriff's Department or by private owners. Each process differs as to the way you bid and purchase, but all are relatively simple. Providing you are realistic in what you can spend and what is reasonable to fix up, you can get a great deal. We are very happy with our home.
From Fannie Mae
Last year, we bought a house that had been foreclosed on. I found it on-line through the Fannie Mae web site. Some points to consider on foreclosed homes: They are usually sold as-is without warranty. The mortgage company may have no idea about problems or remodeling done to the house. If the house was left unoccupied in winter (in the northern part of the country) pipes may have frozen or other damage may have occurred. Have a thorough home inspection prior to buying it. Also with the mortgage holder out of state, it took longer to get our mortgage paperwork completed and approved. Make sure the foreclosure paperwork is properly completed and registered.
A VA Foreclosure
Our home was a VA foreclosure, which we had spotted while looking at the house across the street. Foreclosures must be advertised in the newspaper; however, I strongly recommend scouting around for the little white foreclosure notices, which are posted on the foreclosed houses for some time prior to running the ad. In our case, by the time the ad ran, we had already looked at the house and decided that it was a good investment. The day the ad ran, we pounced. We called a real estate agent who we knew and asked her to bid on the house for us. There were many people who bid on the house, but they all bid at or below the asking price, which was low to begin with. If you know the asking price is a steal, don't be greedy and risk losing the bid. Bid a few hundred dollars MORE than the asking price. We thought our agent was ripping us off to do that, but we got the house for $42,000, when it was appraised at $55,000. Now after some renovations and rising property values, I own a house which is worth more than $100,000.
Buying Through HUD
My husband and I just purchased our first home through H.U.D. (in California). We got a down-payment certificate at the local home show and found a realtor whom we liked and trusted. He mailed us the list of houses for sale each week (you can also get the list every Friday morning online). We would drive by the property and call him if we wanted to see the inside. After 3 months of looking, we found a great house in a fabulous neighborhood. We put in a bid, but didn't think we would get the property. We thought it would sell for 3-5 thousand dollars more than we could afford to offer. Two days later we found that we had won the bid by $243.00. Escrow closes in 2 days! We have a great house, a payment we can afford and have "instant" equity. The house next door, which is slightly smaller, is priced $12,000.00 more than we paid! H.U.D. is a federal program and is available everywhere. Our down-payment was $100.00 and we asked H.U.D. to pay for our closing costs. To move in we will need a total of $350.00 cash. Get a great realtor, get pre-approved with a lender to know how much you can afford and shop around.
I purchased a foreclosed home about a year ago. What I learned is that in my case, the bank would not negotiate a price for 60 days following the listing. If you want to wait and risk not getting the house, that is an option. I also had a pre-approved mortgage though a mortgage company, I don't think that it made any difference to them what kind of house I bought as long as it passed the inspection. Be prepared to deal with some cosmetic damage, like switch plates and light fixtures missing. In my case, the house had been left vacant, and the pipes had burst. Be firm in insisting that this kind of damage be repaired BEFORE you close on the house. The cosmetic things you will probably have to take care of yourself. A little time at the local town hall can also be beneficial, in checking out how much comparable homes in the area have sold for, then you will know whether you are getting a bargain.
Watch the Title
My husband and I bought one of these. We found a realtor in the area who specialized in them. My husband was helping out a friend by looking to see what it would cost to fix this terrible house in a terrific neighborhood. It was way over the friend's head (he's not very handy) but it was the perfect house for us. It was a little more than we could afford at the time but after several more contracts had fallen through the price went down by about $4,000. We knew it was time for us to put in a bid (someone else had a bid on it when we put ours in). The other contract fell through and we got the house. Yea!
Since it was a VA forclosure we got a VA loan. The closing was way too easy. We did everything in the kitchen of our soon to be new house. We had a very low down payment also. One thing that we didn't do (the VA doesn't do any of these things) is get a title search. MAKE SURE YOU DO! We weren't very well informed and several years later when we wanted to get a home equity loan (we had already built up about $11,000 in the value of the home) we couldn't get it because we didn't have the title search. Our realtor told us that the VA wouldn't be able to take it over if there was a title problem. But now it's our problem. So we have to get one and hope there is not a problem!
Our experience has been a good one. We have done a lot of work to our home and have made a great investment. Our neighbors are wonderful and there is really nowhere else I would want to live. We couldn't have afforded half of our house if it were not a forclosure.
Beware of Liens
We live in a good-sized southern city, and here there is an auction every day at the courthouse of foreclosed properties. She might want to start by checking her own courthouse about property auctions to see if they do something similar.
There are two important warnings I want to pass on, however, to anyone interested in foreclosed properties:
#1: Many of these homes have IRS or other government liens on them. If you buy a house with liens, they become YOUR problem. They are not cancelled when a property goes into foreclosure. You can research whether a property has liens on it at the courthouse; sometimes people do this full-time and sell the information in book form (you'd get a "catalog" of upcoming auctions and tax deed sales, including lien information). You might be able to hook up with someone like that at a property auction.
#2: These homes are not always "super deals." Some are terribly neglected and damaged, others may be owned by banks not willing to negotiate much of a price cut.
I recommend ordering both an appraisal and a home inspection (they are two different things) on any home you're seriously considering. Both cost money, yes. But an appraisal by a licensed real estate appraiser gives you the true market value of your home, so you will know if what you're buying really is a "bargain." And a home inspection will give you a detailed report of all defects in the home, so you'll know whether you're looking at major repair expenses.
Different Kinds of Repo
All repos are not equal. A bank repo is different from a HUD or a VA repo. Sometimes, by calling a bank they can give you a list of their repos -- however -- where I live banks list their homes with Realtors. HUD & VA homes can be found on the internet but to buy one you will need to use a Realtor -- I suggest one who has experience in these fields. Most of the time utilities are not on, making home inspections difficult. This does not mean that repos are bad buys. Some can be very good needing only cosmetics. Use your eyes to do a good visual inspection. Tell tale signs of water spots on ceiling (roof trouble), water spots under sinks, signs of termites, etc can be seen. Buying a repo can be a very good experience with a little know how and caution. Each area is different so it also depends where you live. Happy house hunting!!
Remember, It's Sold "As Is"
We purchased a reposessed house this summer when my husband was transferred from OK to GA. We got a good deal. From our calculations, the house was undervalued at least 25%. The government (loan holder) was eager to sell, as each month that passes they lose more money. They did negotioate a little bit on the price, but not much. The big disadvantage is that the house was sold "AS IS", and they would not negotioate at all for repairs.
Calculator: How much mortgage can I afford?
There were A LOT of things obviously wrong with the house (holes in wall, water heater non functioning, rotted floor, holes in kitchen floor, holes in roof, dead bird in hole in wall, etc.) We kept out money for repairs, but underestimated, and after living in the house for a couple of months have found more problems (shower pan leaks, lights that don't work, garage door opener that does not open, etc.) We still feel that this house was a steal, and we stand to make a tidy profit when we sell. My advise, make sure you have enough money to fix things! When someone loses their house, they probably have not had money to keep things in good repair while they were living in it.
Dee W. of Milledgeville , GA
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