The flood of foreclosures we’ve seen in recent years has turned into a swift stream.
For years, many buyers routinely steered clear of foreclosures and short sales. In their minds, such properties were “damaged goods” — real estate remainders that were likely to be dumps and money pits. Why risk such a big investment on a property sold in distress? We’re now in a housing market unlike any we’ve seen in years. Inventory is tight in many areas. Meanwhile, the poor economy of the past few years has produced more properties in foreclosure or offered as short sales.
So, if you’re in the market to buy, the deals you’re likely to find aren’t quite as compelling as they once were.
But if you can find the right foreclosed home, you can still get a bigger, better house than you otherwise could afford. About 5 million homes have gone through foreclosure in the half decade since the housing collapse, but the rate of foreclosure is falling in many markets. And so, as you enter the market either for the first time or as a seasoned buyer, you should be on the lookout for “distressed” sales. You might find a great property you’d otherwise have overlooked if you categorically disqualified foreclosures and short sales. And when the market is tight, looking at distressed properties makes even more sense.
Whether you’re buying a foreclosure to turn into your primary residence or to rent out, you don’t just want a cheap property — you want a good value.
Here’s a list of a few tips that can help you buy the right foreclosure for you.
1) Never buy a foreclosure sight unseen.
When you buy a repossessed home at auction, you usually can’t enter the property to assess its condition before you bid. At best, you might be able to view the exterior, peek in the windows and chat up a neighbor about the property’s recent history.
2) Buy repossessed homes through a real estate agent.
When the home goes to auction and no one bids, or no one bids enough to cover the outstanding mortgage, the bank that holds the loan gets title to the home. These become what are known as real-estate owned (REO) properties. The bank will usually repair the worst damage and hire a real estate agent who specializes in foreclosures to market the home. That selling agent will allow you to see what’s inside so that you know exactly what you’re buying. Foreclosures and short sales aren’t just your typical buyer/seller situation. They involve more layers. In a bank foreclosure sale, also called real estate owned (REO), the bank is the seller. Because the bank employees have never lived at the home, they know nothing about the property. To them, the home you’re considering buying is simply a statistic — a cell within a large spreadsheet viewed by a worker behind a desk halfway around the country.
3) 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 are so trashed that you can’t live in them before making repairs. For $300 to $500, a home inspector can help you spot all of the problems. A home inspection is important with any home purchase, but especially with foreclosures.
4) Know what similar homes are selling for.
You can find “comps” for the property you’re considering on Zillow.com and Redfin.com and SOON www.mygreatloan.com. You’ll get actual sales prices for similar, nearby properties that have sold recently, not asking prices or the unreliable estimated values that Zillow creates based on real estate records. You won’t always be able to tell the condition of the homes that recently changed hands — though sometimes listing photos are still available and can give you an idea — but you’ll be able to establish a range of prices, a typical price per square foot and an average price. Eliminate any comps with extremely low prices. These may be transactions between family members that don’t reflect market value. Make sure your offer includes a “subject to” clause that lets you out of the deal in case the appraisal your lender orders once you’re under contract comes in low.