Deal Or No Deal in Today’s Foreclosure Market?
Deal or No Deal?
Five Things You Need to Know Purchasing a Foreclosure Home
As we anniversary two years of home values decreasing it is any one person’s best guest as to when the real estate “bubble” will be completely empty and out of air. I can tell you that with the decrease in home values and recession economy, if there was ever a time to get in on a great real estate deal, the time is right now. Homes that ended up in some type of foreclosure were up 79% in 2007 over the previous year (Associated Press, January 29, 2008). In 2008 foreclosures continue to rise at a ramped rate. Nevada, California and Florida lead as the top three states for foreclosures in the United States. In Florida, one is every 282 homes are in foreclosure.
Not only is it important for the economy that this inventory of foreclosures get dissolved through purchases, there are some fantastic opportunities for people to buy. There are some important factors that you need to know about before you look at your first foreclosure.
1. The Hunt Begins: You need to know where to find the properties. There are many websites available if you just perform a quick search. I always recommend working with an experienced real estate agent who has access to the Multiple Listing System (MLS) and knows the area. There are some agents who work with other Real Estate Brokers that have spent money getting the property ready for you to move in. Basically the listing broker has spent their own funds to paint and clean the property so that it is a “turn key” solution for a potential buyer. These properties always “show” better and it takes away the thunder cloud image most have about foreclosures; toilet missing, AC unit pilfered, etc. Use the internet to research the properties if you chose to explore on your own. There are many great sites that can give you a lot of information on the properties.
In researching my morning paper Sunday in the Real Estate section, I found a quick article naming the top foreclosed subdivisions in my county. Finding this information will give you an idea of where the opportunities to find a deal are. Supply and demand do play in the economic environment of real estate which by theory means that if there are 100 foreclosed properties in a town of 10,000 homes, you would have more leverage that if that same town only had 1 foreclosed home.
2. What is it worth?: Not all properties owned by the bank are great deals. Some of the properties in foreclosure today do not have much equity in them because they were purchased with loose-lending practices and the banks did not require 20% down. You will need to do some homework if you are working without a licensed real estate agent to ascertain the properties value. Using websites in the easiest way to do this and I would recommend to keep it simple and look at two things. The first is the tax assessment for the subject property that you are looking at purchasing. What does the county tax office assess the property at versus what the bank is asking? The second thing I would recommend looking at is www.zillow.com. This is a great site to research recent sales in the neighborhood you are looking at. It will give you most recent sales price and date. I would look at the most recent sales prices to make a fair valuation of the subject property.
Finding a home that is priced below what the average home value is gives you instant equity in that property. As property values increase your equity will increase as well and your return on investment will also increase. One thing to remember is that you need to do your research to determine if it is a good deal or not. If the property is $ 20,000 below the average home value in the area but needs AC repair st cloud Florida of $ 45,000 it is obviously not the deal of the century.
If you find a property that you really like that is a “pre-foreclosure” property, you and your real estate agent can possibly work through a short-sale. This is a process where a formal offer is presented to the bank and is subject to the approval of the bank. Basically, the purchaser is saying “I am willing to pay you $ 100,000 for this property even though the outstanding mortgage on it is $ 130,000”. The mortgage is usually already in default and the bank has to make a financial decision to either cut the loss now, accept your offer and move on or do they want to foreclose on that property and own it until it sells. Banks typically spend $25,000 or more on each foreclosure they have. There are many short-sale deals out there and working with a licensed real estate professional can help you because most of this information is listed in the MLS.
3. You’re Approved!!: If you are really serious in obtaining a foreclosure property it is necessary to line up financing right away prior to your search. When you find that perfect house that you want you need to act on it right away. Having financing secured or cash in hand will ensure deals wont slip through your fingers. The real deals will simply not last. I have seen deals go off the market within 12 hours of being listed because someone had the financing element worked out already and was able to secure the deal.
It is also important to secure your financing because some lenders may not work with distressed properties. You may need to shop around for a mortgage broker or company that specializes in distressed properties or use creative financing. I know of clients who use their 401K to purchase distressed properties that are now rental units for them and they will sell them once prices start to increase again.
4. You’re Safe!: When dealing with foreclosure properties it is critical to get it inspected even if it is a newer home. People that have trouble making their mortgage payments typically don’t spend any money on maintenance. Foreclosure properties are sold “as is” so it is especially important to know what you are buying, what repairs need to be made and any other issues such as foundation or roofing issues. You may still decide to purchase the property even if there are some minor repairs needed; it all depends on what you are using the home for and your budget.
Use a qualified home inspector and go over the report with them in detail. Find out their expert opinion regarding the needed repairs. I also recommend that the inspection includes a termite inspection as well. Some inspections include this automatically and in some states it is a separate work order. Find out what your lender requires for the purchase as well.
5. The Appraisal Process: Your lender will call for an actual appraisal to be conducted by a licensed real estate appraiser. If your real estate agent has done a great job on the Comparative Market Analysis (CMA) then you should be in the same ball park as the appraiser. The appraiser is what your lending institution is using to ensure that they have a good investment in this property since it is the collateral they are loaning the money on.