Basic Guide to Buying Foreclosed Properties

By Heindrick So
Calculators for Mortgages Columnist

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What You Need to Know:  Basic Guide To Buying Foreclosures

One of the upsides of the recent housing downturn has been the rising availability of discount homes and bargain opportunities. As a result of increased foreclosure activity, potential buyers have found this recent market a fantastic time to get a great deal. In a recent report by the Wall Street Journal, analysts estimate that almost 50% of home resales in many areas have been a result of foreclosures. But make no mistake, although buying foreclosures is nothing new to the industry--recent experience shows that these deals are not for the faint of heart.

Thinking About Buying a Foreclosure? Think Twice

The first rule in buying foreclosures is to get the idea out of your head that "foreclosure" is some kind of code for "screaming deal." Unlike a traditional transaction, foreclosure sales often bring more headaches and complexities along with the (hopefully) discounts. Some damaged properties may actually costs buyers more than a traditional purchase, while others may have trouble obtaining a mortgage for a foreclosed property--many of these courthouse transactions require all cash upfront. Especially for first time home buyers, dealing with the purchase of a foreclosure may be too much to handle.

How Much Home You Can Afford? Use an Online Mortgage Calculator

Like any other purchase, potential buyers should first figure out how much mortgage they can afford. By using an online mortgage calculator, buyers can create quick loan comparisons and amortization charts to help plan ahead. Although foreclosed properties can yield significant discounts, you still need to make sure you stay within your budget.You can use this mortgage payment calculator to get a better idea of what your monthly payments would be. Remember, a lot of the foreclosed properties you see now are a result of homeowners failing to borrow within their means.

Invest in Professional Help

After completing your own preliminary work, the best advice would be to seek professional help to assist you throughout the process. Recommended professionals include Realtors, home inspectors, and appraisers. For the best help, find individuals who've had previous experience with foreclosed homes. With a team of professionals by your side, you might cut into your discounts and pay more for the help--but at the end of the day, you'll have less on your plate and a better shot at scoring a great foreclosure purchase.

Find the Best Mortgage Lender and Obtain Financing First

With foreclosure transactions, even the most qualified borrowers will need to make sure they can obtain an appropriate mortgage. Since foreclosures are a bit more risky, some mortgage lenders may have special restrictions or stricter guidelines set in place. At this step of the process, you want to make sure you can get financed first; this way you can focus your efforts elsewhere once you have a property in sight. To start the process, try using an online mortgage prequalification calculator.

Research the Area and Neighborhood of Interest

Remember the cliché real estate mantra, "location, location, location?" In this current housing market, it's now more important, and necessary, to review the surrounding neighborhoods in addition to the property itself. Especially in the case of foreclosures, you want to find out why your home was foreclosed on, and if other homes are likely facing the same mortgage troubles. With the help of your appraiser, review recent transactions, pending sales, and other indicators of where your area's market might be heading. The ideal situation is a single foreclosure in an otherwise healthy neighborhood.

Be Careful with Foreclosure Auctions

Interestingly, not all foreclosures are the same--it depends where the foreclosure is taking place and the laws there. But in general, there are three major processes when a mortgage lender forecloses on a property. First it will issue a notice of default (NOD). Then after non-compliance, it will begin with the notice of trustee sale (NTS). During this time, the homeowner is given the chance to "cure" the default by paying delinquent charges. Then the property is auctioned. Often people don't even show up at these auctions because the opening bid is what's owed on the property. The lender hasn't had the chance to value the property yet and set a realistic price. Finally if the home does not sell at auction, the property is turned into real estate owned (REO).

Of the three purchasing periods, potential buyers must be especially careful of the foreclosure auction. Purchasing a foreclosed home during the trustee's sale can yield big savings; unfortunately, the auction presents the biggest risk. Typically, these sales occur with little knowledge of existing damages, limited title insurance, unknown lien history, and other variables. To get a better idea of the complex process, buyers should attend an earlier auction without intent to buy beforehand.

Compare Lenders and Search Their Inventory of Homes

In addition to auctions, potential buyers can search through the inventory of homes owned by the banks (REOs). A Realtor with foreclosure experience should be able to search the inventories of REOs in your selected area and give you a chance to look through each one. Although the discounts may not be as steep as with auctions, buyers have a bit more flexibility at this stage of the game. Some lenders might be willing to negotiate more than others, so be sure to compare lenders when searching through these foreclosed homes.

Always View the Property in Person, and Bring Professionals, Too

Once you have the property in sight, always view the property in person before making any offers. If the home is truly a bargain, chances are you won't have much time to inspect the property as others may be interested. Regardless, try your best to bring your own inspector, or appraiser, to complete a thorough walkthrough of the property. Don't expect to find perfection among foreclosures, but don't buy a bomb either. There are many more deals to be had elsewhere, so don't be afraid to pass on the first few findings.

Evaluate the Need for Repairs and Rehabilitation

Now that you've had a chance to inspect the property, it's time to get real and figure out the damage. Start by categorizing the repairs into levels of severity. Many homes likely have neglected front lawns, swimming pools, or just need a new fresh layer of paint. This type of "damage" is more aesthetic and can be quite manageable. It's the more serious problems such as plumbing issues, electrical issues, and termite damage that pose more serious threats. Among the physical damage, be sure to review other issues such as clearing the title (often referred to as "quieting" the title if there are outstanding issues) and taking care of any tax liens. Unfortunately, when buying a foreclosed property, one of the biggest headaches will be inheriting the problems of the previous owner.

Don't Be Afraid to Walk Away

The best advice is to leave your emotions out of the home buying process. Don't get rushed into buying so soon, and don't feel pressured into buy a specific property. If some part of the process doesn't seem right, pass on the deal and move along. Your biggest advantage when shopping for a foreclosed home is your ability to simply walk away

 

About the Author
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.