By Cathy Salustri
With over 3.1-million more homes at risk of foreclosure, speculators and new homeowners entertain dreams of buying foreclosures to get that real steal. Unlike buying a new or resale home, buying foreclosures takes a key buyer beware attitude so you don’t get burned.
Internet based services like Foreclosure.com and Realty Store.com provide consumers the inside track on opportunities to buy foreclosures before they hit the resale market. For a small monthly fee, buyers can access foreclosure and pre-foreclosure properties that had only been available to very few previously.
There are three types of foreclosure properties, which represent different steps of the process. The notice-of-default is the first step along with notice of trustee sale and then a full foreclosure, which has been re-purchased by the bank when it has already been auctioned off on the courthouse steps. Here are the six best steps to follow to protect buyers from getting burned.
1. Foreclosure Doesn’t Always Equal “Bargain.”
Some foreclosures sell for fifty cents on the dollar, but Peter Formica, a seasoned REO (Real Estate Owned) investor in Ohio, who has purchased over 50 foreclosures calls that unrealistic. Other foreclosure experts say it’s 2 to 3 percent that sell for 50 cents on the dollar.
“If you really want to be realistic and not look through rose-colored glasses, you’ll pay 65-70 cents on the dollar for a property in a desirable location,” Formica says. Most foreclosures need repairs. The previous owner may have removed appliances, fixtures, electrical or plumbing. Some foreclosures are vandalized.
“Only three or four foreclosures out of a hundred don’t need anything (work), and looking for that home is like looking for a needle in a haystack,” said Formica. On average repairs equal about 10-15% of the home’s value.
2. Inspect Everything
Gather as much information about the property as early in the process as possible. Pay to have the water, gas and electricity turned on before closing (preferably before the inspection) so inspectors can test the mechanicals. Lenders may require a general home inspection, but also invest in septic, well, plumbing and electrical inspections. It’s advisable to also get a termite inspection in climates where termites are present. If the property has a basement, find a qualified foundation inspector.
3. Walk Through
Go on the final walk through. Foreclosures come “as-is” so double check everything. The day before closing, visit the property and try to be emotionally detached. After all, there are tons of properties on the market these days and you’re only buying one normally or a few.
4. Pre-Qualify Early for a Mortgage
Get pre-qualified early in the process by a bank or mortgage company, preferably before engaging in discussions to make a purchase at all to determine how much home you’ll be able to purchase. This gives the buyer the strongest position in terms of negotiating a price, and ensures the buyer is in a position capable to make a purchase. Being fully pre-approved with the exception of an appraisal gives the purchaser added bargaining power, and may also provide the possibility of taking over the existing mortgage, saving on expensive closing fees.
5. Title Insurance Counts
Before purchasing any foreclosure property, make sure it’s free of any bankruptcies, tax liens or other financial liabilities. IRS tax liens can take your property back for up to 10 years. So check the background of the seller or make sure the title insurance company does so you don’t have problems later.
Title companies make sure no one else can claim title to the home. This includes checking for property liens. Michele King, a Florida Realtor, says that even title companies miss things sometimes. “I’ve had houses that two owners later had to pay a water bill (on). It’s the little liens that you really have to look out for,” King cautions. Many title companies don’t check for unpaid utility bills, condo assessments or code enforcement liens. Ask the closing agent to check the title a day or two before closing.
6. Get a buyer’s agent
Navigating a foreclosure purchase can get tricky, so don’t hesitate to find a real estate agent versed in foreclosures and REOs. Find a specialist, who has had practice in foreclosures. Unless you used to work for a bank foreclosure department, as a building inspector or carpenter a buyer’s agent can be helpful guiding you through the process.