Real Life and Real Estate – Joe Estabrooks

So you are looking for a killer deal on a foreclosure?  Excellent!  There are many opportunities out there for the savvy buyer willing to consider purchasing a foreclosed property.  Before jumping in head first, make sure you understand the challenges on buying one of these homes and how to come out on top.

Let’s review a little about why you would want one…

The Pros

Good price (maybe)

The Cons

Cosmetic condition

Damage and maintenance issues

Title issues

As-is (lender may not be willing to make repairs- this might prevent your loan from being approved!)

Bidding wars (yes, really- it’s a hot market for bargains)

So what should you have ready before you close on a foreclosure:

• Contractors who can help provide estimates for repairs and upgrades.  This way you will be able to accurately budget certain costs.  Most buyers who have done so recently can not guess whether it will cost $3,000 or $6,000 to repaint a home or install new carpet.  The better you are at sizing up a home, the easier it will be to recognize the “value” of a home.
• Professional and experienced home inspectors.  Look for one that has good references, is insured, and certified.   For example, ASHI Certified inspectors have completed over 250 inspections and passed tests.  Although home inspections can not find al hidden damage, certain warning signs might indicate potential problems.
• Title Search… CLEAR TITLE!  Very often the bank will offer an incentive for you to close using “their own” title & escrow company.  This might mean that customary fees for survey, title insurance, and title work may be paid be the seller.  The savings could be big ($1,000)!  If no problem ever arises then it might not be an issue.   If an issue does come up, you will probably feel a lot better if you know and trust the people overseeing it’s resolution.  There is also a better likelihood that you will receive reliable and timely communication about what is going on.  So should you spend a little more and elect to use your own title company

Making the offer:

Now that you have found the home, it’s time to put in an offer.  Should you just “low ball” them because all banks are desperate to sell?  Not always.   Here are some stats I pulled for foreclosure sales in Springfield, VA in the last 30 days:

Average listing price: $275,179

Average SALES price: $280,042

Average subsidy: $5,149

Net sales price average: $274,893 -  Net sales/List price ratio= 99.9%

Q: Does that mean if you are paying full price you are not getting a good deal?

A: It all depends.  The list price is very often aggressively low.  Have you ever heard that foreclosures are hurting the values in surrounding neighborhoods?  Maybe that is because their goal is to quickly unload a bad asset and not necessarily get the full market value of a home.  Hey, the home that is selling for $400,000 today may have cost $100,000-200,000 more at the peak of prices.

Q: Are foreclosures always good deals?

A: Absolutely NOT!  Before making an offer you should closely look at the comps and for homes needing work or repairs, carefully budget for this.

Tips on Financing:

Being pre-approved is important. We all know that.  What is not always known is that damages and defects will often require to be repaired by your lender.  For example, there might be a broken window, rotted wood trim, etc.  On the homes in rougher condition the lender may not even accept an offer that is using typical VA, FHA or Conventional fincnaing.  In anticipation of a loan contingent on property condition repairs they may ask that only offers with cash buyers and 203(k) financed loans be submitted.

What is 203(k) and why should I learn about it?… The FHA 203(k) loan is a flexible and government insured loan that is available regardless of property condition.  It allows money to be budgeted for such things are new appliances, paint, new roof, flooring, HVAC, electrical, plumbing and a whole list of other repairs.  The cost of these repairs are rolled into the loan balance.  It requires a small 3.5% down payment and is limited to owner-occupants.  More information is available here:  http://www.hud.gov/offices/hsg/sfh/203k/203kmenu.cfm