You want to buy aforeclosure? Remember, there are both great opportunities and great pressuresand pitfalls in this market.
First, you have to decideat what stage of foreclosure you want to buy. There are three options: 1.pre-foreclosure; 2. sheriff's auction; 3. repossession, called REO (for realestate owned by the bank).
"The safest and bestway to buy is when it's a bank-owned property," said Rick Sharga, aspokesman for RealtyTrac, the online marketer of foreclosure properties.
Pre-foreclosure: Thesehomes are in the foreclosure process, but they have yet to be sent to auction.Owners are typically trying to unload them because they are"underwater," owing more on the homes than they are worth.
As a result, potentialbuyers must negotiate a deal with the lender as well as the owner. That makesbuying at this stage of foreclosure complicated and slow. But, you have theadvantage of being able to inspect the home before purchase -- which isn't thecase in other types of foreclosure sales. Sharga warned, however, that pricesare usually higher than at other stages of foreclosure.
Sheriff's auction: Thesesales yield the lowest prices, but they are fraught with difficulties. Oftenthe house is unavailable for inspection, leaving buyers with a long list ofexpensive repairs -- and much larger bill than they intended. This stage isusually best left to the professionals, the contractors and investors whoregularly bid on these places and know what they're doing.
Repossession: This occursafter the home has gone through a sheriff's auction but does not sell and thebank gains possession of the property. Homebuyers may not get the best bargainsduring this stage, but they can nearly always perform a thorough inspectionbefore closing, minimizing costly surprises. Plus, the property comes with aclear title.
In addition, the banksselling these places may extend preferential financing terms to the buyers andmay have made some repairs before putting the property on the market.
Even in this safer stage,though, homes are still usually sold in "as is" condition. "Thatmeans the bank won't pay for cosmetic issues," said Adam Wiener, aspokesman for the Redfin, the online real estate marketer. "Although, theywill often pay for some or all of repairs that are health and safety issues.That makes the home inspection even more critical."
He also pointed out that,since you're buying from a corporation, not an individual, the buying processcan be faster, so be prepared to move quickly. Many times a listing goes on saleon a Friday and is sold over the weekend.
"The buyers and theiragents need to be on top of everything from the inspection to thefinancing," said Wiener. "Some banks will even charge a per diem feefor late closings."
Once you've decided whichtype of home to buy, there are several common mistakes foreclosure buyersshould take care to avoid. These include:
Getting caught up in abidding frenzy: The banks often under-price repossessions, hopingto generate excitement, attract multiple bids and sell them quickly. Theproblem is, as in any auction-type sale, bidders get excited and pay too much.
"Remember," saidSharga, "there are 800,000 REOs in the banks' inventories. There'll beanother home to bid on tomorrow."
Underestimating repaircosts: Take full advantage of the home inspection and don't delude yourselfabout much the repairs will cost.
"Take along someonewho can give you a good estimate of how much repair costs will come to,"said Sharga.
Redfin coaches its agentsto warn buyers to factor in a cushion of 10% to 20% of the purchase price topay for unexpected repairs. "If you end up not using it, go on vacationafter 6 months," Wiener said.
Not knowing whatcomparable properties cost: This is important in any market butespecially in this endeavor. In high foreclosure areas, prices can be erodingvery quickly. You want to have the latest homes sale prices on repossessedproperties and try to keep your bid comparable or lower.
Buying in a neighborhoodflooded with foreclosures: This is most important for people buying forthe short-term. Any neighborhood saturated with REOs and foreclosures may beheaded for further price falls. If you're planning to relocate within a fewyears or buying a bigger house, that could mean selling at a loss. A betterbet, if you can find it, is to buy the only foreclosed home in an otherwisestable community. That's more likely to hold its value.
Not having financing inplace: If you don't have a pre-approved mortgage, you're really not in themarket. "You have to be able to move quickly," Sharga said.
Banks don't want todilly-dally on sales; they're losing money every day that homes sit on themarket. That means they'll often jump on the highest bid with the bestfinancing already in place.
Having a loan beforehandcarries another advantage: It tells you how much credit you have available. Youwon't spend time shopping for homes that are too expensive.
Remember that pre-approved financing is different from pre-qualifiedfinancing; it means the loan is ready to go. Pre-qualified is more like anopinion of a loan officer and there's still work to be done before finalapproval