You want to buy a
foreclosure? Remember, there are both great
opportunities and great pressures and pitfalls in this market.
First,
you have to decide at what stage of foreclosure you want to buy. There
are three options: 1. pre-foreclosure; 2. sheriff's auction; 3.
repossession, called REO (for
real estate owned by the
bank).
The safest and best way to buy is when it's a bank-owned
property," said Rick Sharga, a spokesman for
RealtyTrac,
the online marketer of foreclosure properties.
Pre-foreclosure:
These homes 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, potential buyers must negotiate a deal with the lender as well
as the owner. That makes buying at this stage of foreclosure complicated
and slow. But, you have the advantage of being able to inspect the home
before purchase -- which isn't the case in other types of foreclosure
sales. Sharga warned, however, that prices are usually higher than at
other stages of foreclosure.
Sheriff's auction: These sales yield
the lowest prices, but they are fraught with difficulties. Often the
house is unavailable for inspection, leaving buyers with a long list of
expensive repairs -- and much larger bill than they intended. This stage
is usually best left to the professionals, the contractors and
investors who regularly bid on these places and know what they're doing.
Repossession:
This occurs after the home has gone through a sheriff's auction but
does not sell and the bank gains possession of the property. Homebuyers
may not get the best bargains during this stage, but they can nearly
always perform a thorough inspection before closing, minimizing costly
surprises. Plus, the property comes with a clear title.
In
addition, the banks selling these places may extend preferential
financing terms to the buyers and may 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. "That means
the bank won't pay for cosmetic issues," said Adam Wiener, a spokesman
for the Redfin, the online
real estate marketer. "Although, they will 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 process can be faster, so be prepared to move quickly. Many
times a listing goes on sale on a Friday and is sold over the weekend.
"The
buyers and their agents need to be on top of everything from the
inspection to the financing," said Wiener. "Some banks will even charge a
per diem fee for late closings."
Once you've decided which type
of home to buy, there are several common mistakes foreclosure buyers
should take care to avoid. These include:
Getting caught up in a
bidding frenzy: The banks often under-price repossessions, hoping to
generate excitement, attract multiple bids and sell them quickly. The
problem is, as in any auction-type sale, bidders get excited and pay too
much.
"Remember," said Sharga, "there are 800,000 REOs in the
banks' inventories. There'll be another home to bid on tomorrow."
Underestimating
repair costs: Take full advantage of the home inspection and don't
delude yourself about much the repairs will cost.
"Take along
someone who can give you a good estimate of how much repair costs will
come to," said Sharga.
Redfin coaches its agents to warn buyers
to factor in a cushion of 10% to 20% of the purchase price to pay for
unexpected repairs. "If you end up not using it, go on vacation after 6
months," Wiener said.
Not knowing what comparable properties
cost: This is important in any market but especially in this endeavor.
In high foreclosure areas, prices can be eroding very quickly. You want
to have the latest homes sale prices on repossessed properties and try
to keep your bid comparable or lower.
Buying in a neighborhood
flooded with foreclosures: This is most important for people buying for
the short-term. Any neighborhood saturated with REOs and foreclosures
may be headed for further price falls. If you're planning to relocate
within a few years or buying a bigger house, that could mean selling at a
loss. A better bet, if you can find it, is to buy the only foreclosed
home in an otherwise stable community. That's more likely to hold its
value.
Not having financing in place: If you don't have a
pre-approved
mortgage, you're really not in the market. "You have
to be able to move quickly," Sharga said.
Banks don't want to
dilly-dally on sales; they're losing money every day that homes sit on
the market. That means they'll often jump on the highest bid with the
best financing already in place.
Having a loan beforehand carries
another advantage: It tells you how much credit you have available. You
won't spend time shopping for homes that are too expensive.
Remember
that pre-approved financing is different from pre-qualified financing;
it means the loan is ready to go. Pre-qualified is more like an opinion
of a loan officer and there's still work to be done before final
approval.
For information about the Sarasota
Real Estate Market, visit
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