First-time home buyers and investors looking for a bargain may consider foreclosed homes. Such properties are in abundance across the nation as homeowners continue to default on their mortgages and abandon their properties.
While a foreclosed home can and should be viewed as an opportunity, there are several considerations prospective buyers should consider before making an offer.
1. Finding homes in preforeclosure. In some markets, foreclosed homes are snapped up fairly fast with very little of a discount present available. What you want to do is find those homes that are in preforeclosure and striking a deal with the owner as soon as possible.
Homes in preforeclosure are those where the homeowner is behind on his mortgage payments by several months. He may not be aware that his home is on the way to foreclosure, but a public notice of intent of foreclosure will tip you off that this is so. At this point, you’ll want to approach the homeowner directly to make an offer for his home. You may be able to arrange a short sale, an option that allows you to buy the home at a reduced price and with banker approval. Keep in mind that the homeowner may not know that his home is in foreclosure, thus your news may not be welcomed.
2. Go to auction. Provided that you have cash to pay for a home in preforeclosure, this option is not right for you. Then again, if a home is being auctioned by the bank, that deal will take place at your local county courthouse.
In an auction you’ll be expected to pay cash for the home and cover whatever liens are present. This means that if money is owed to the city for property taxes, to the utility companies for electricity, heat or water, or to the bank for missed payments, then you’ll need to make these payments to obtain title. At this point, the profit you make might be quite small, plus you’ll have to come up with cash to buy the home.
3. Homes in foreclosure. If a home is not sold in auction, then it is listed by the bank for sale through a real estate broker. At this point everyone that is seeking to buy a foreclosure will know that the home is available.
Once a home is listed in foreclosure, you’ll find it more difficult to obtain a deep discount from the bank. Saving money, however, is not impossible as local housing conditions can determine whether you have room for negotiation. In markets saturated with foreclosed homes, you’ll have much more room to negotiate. However, in markets that are experiencing a rebound with few foreclosures, your pickings will be slim and your discounts very small. Understand your local market conditions to determine how to proceed.
4. Repairs and such. Buying a foreclosed home means that you’ll likely have to handle some repairs. After all, the previous owner wasn’t in a position to maintain the home or simply gave up.
You can lose your shirt on a foreclosure if you do not correctly determine what needs to be repaired and the costs of these repairs. If you can do the repairs yourself, then you’ll save money. If you need professional assistance, you’ll need to estimate those costs and subtract that amount from what you’ll pay for the home. Your profit could be slim and the deal more of a headache if major repairs are required.
5. Finding government-owned homes. Not all foreclosed homes are listed by real estate brokers for banks. Homes that are backed by the Veterans Administration or Federal Housing Administration are placed on the market by the government directly. Handled by the Department of Housing and Urban Development, such homes are available through HUD-registered brokers only.
The advantage here is that such homes are available for homeowner occupancy only, at least for the first 45 days. This means that private home buyers won’t have to compete with investors for the property. Discounts are typically good and reflect the condition of the home. As always, keep in mind that repairs can effect the overall value of any foreclosed home.
If you are purchasing a home as an investment with an eye to flipping it through a quick transaction, keep in mind that there are several expenses you will need to shoulder until the home is resold. Those expenses include property taxes, utility bills, yard maintenance and the like. You may also have to pay real estate broker fees when selling and pay fees and expenses to your city for permits.