Tips for Buying a Foreclosed Home

Get a realty broker and a lender

The first 2 steps in buying a foreclosure should happen almost simultaneously: Find a real estate broker who works directly with banks that own foreclosed homes and get a preapproval from a lender.

A good way to start searching is to first visit any site with a database of foreclosed homes. You also could look at a local real estate website that lets you filter the results to see only foreclosures. You might find the acronym REO, which means “real estate owned” (owned by a bank, that is). This signifies that a home has been through foreclosure and the lender is selling it.

Get a broker on your side

The goal of combing through foreclosure listings is not to find a house; it’s to find an agent. Banks usually hire one or a few real estate brokers to handle their REO properties in a market. In a lot of cases, the buyer works directly with the bank’s broker instead of using a buyer’s agent. That way, the commission doesn’t have to be split between 2 brokers.

Most of these Realtors have a long-term relationship with these banks, and they know of listings that haven’t even come on the list yet. Call them about the listings that you’re interested in, but also ask them about listings that may be coming up because sometimes it may take a day or two or even a week before a listing actually comes onto the database.

Such a request might not always pan out. In places where thousands of foreclosed properties are for sale, you might not get much one-on-one attention from overloaded agents. To prove that you’re serious about buying, meet with the lender right before or after you meet with the agent.

Get a preapproval letter

Unless you plan to pay cash, you’ll need a recent preapproval letter from a lender. The letter will describe how much money you can borrow, based upon the lender’s assessment of your credit score and income.

Consider your financing options before you make an offer.  All too often, a buyer wants to find the house first, and then they think they’ll work out the financing. But a really good deal on a bank-owned home will go quickly, and the buyer won’t necessarily have time to try to work out the financing afterward.

Some first-time buyers make the mistake of assuming that the bank selling the home will also finance the mortgage as part of the deal. Banks view this as a totally separate transaction, so don’t assume it will be included. The people in the bank’s REO department are not loan officers. They are getting rid of bad assets.

Pricing depends on sales pace

There’s no rule of thumb on what the bank’s bottom line is on price. Just as with any other real-estate purchase, you have to look at the recent sales prices of comparable properties, or “comps.”

You have to look at the comps in today’s current market conditions and write a competitive offer based on that. Sometimes the bank prices the homes really low, and the home will have multiple offers over list price within hours. Other times it’s priced too high, and you can come in lower. However, be reasonable with your offer.  If it’s unreasonably lower than the listed price (as much as half price), your offer won’t be taken seriously.

Don’t expect a repair discount

Keep in mind that foreclosed houses generally are sold as-is. That means that you shouldn’t expect to get a discount to compensate for repairs. Consider a house listed for $200,000. All the comps are $200,000, but the home will need to be repainted, re-carpeted and treated for mold damage. Despite the impending repairs, a client’s request to take $15,000 off the price to cover the costs will be denied.

You should also look at the absorption rate for your product class, meaning you should find out how quickly comparable houses are selling. In foreclosure, a 3,500-square-foot house with a pool in a gated community might sell within days or hours, whereas more modest homes might sit on the market for weeks. Or vice versa, depending on market conditions.

If homes in your product class are selling swiftly, the best advice on a bank-owned property is to come in at your highest and best, unless the property has been sitting on the market forever with no activity. If you’re going to be upset because you would have gone $5,000 more, but you lost the property, just bid the higher price in the first place to ensure your chances.

Find tradespeople ASAP

Because repairs are almost inevitable with foreclosed houses, it is recommended that you get to know tradespeople who can assess and repair damage from pests, mold and leaks. Assume that the air conditioning needs to be fixed, and possibly the heating system, too.

It all sounds daunting. But at least you don’t have to wait for the owner to move out of the house.

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Originally posted at: Lafayette Real Estate News