First Time Buyers: How to Buy a Foreclosure

First Time Buyers: How to Buy a Foreclosure

by Brent Wilson

First Time Buyers: How to Buy a Foreclosure by Brent Wilson Reochronicle.com/blog

If you've made up your mind to buy a house and are prepared for all the things that go along with home ownership (repairs, lawn care, property taxes, insurance, etc) you'll often get the best deal if you buy a foreclosed house.

Foreclosed houses run the gamut from houses that should be torn down, all the way to move-in condition. You shouldn't get a bad attitude about foreclosures just because you've seen some places in bad shape--many are actually in good shape, with just some minor cosmetic issues.

If you want to get a real bargain, you have to learn to look past bad paint, carpet, and other cosmetic issues, which usually aren't expensive to deal with. Better to focus on construction quality, whether or not a place was really well built to begin with, as well as the condition of the plumbing, foundation, heat and air and so on.

If you don't know construction quality, have someone who does take a look at a place before you even make an offer. If you get far enough along to be interested in making an offer, it would be wise to spend $100 or whatever to have a remodeling or building contractor take a quick look around to tell you about any issues he can see, and whether the house is generally well built with quality materials, before you even make an offer. If the place checks out, then make an offer.

It's surprising how many expensive houses use cheap materials, cut corners on construction, etc. Many first time buyers get sucked into buying a poorly built house because they don't know anything about construction quality and they are excited by the whole idea of owning a house. Be sure the biggest purchase of your life is well built with quality materials.

If you don't know a lot about houses, better to weed out places which need a great deal of work. Some foreclosures can eat your lunch. Not every foreclosed house is a bargain, and if a place is extremely cheap there is usually a good reason, which may not be obvious until much later.

I'm not trying to offer any form of legal advice, but rather to give you an outline of how the process works, which really isn't all that complicated once you know a few basics. If you follow a few simple procedures, and are cautious and methodical, it could save you a lot on the biggest purchase of your life.

Sources of Information on Foreclosed Houses

Most Realtors can show you foreclosed places, although some Realtors prefer not to since they don't understand the process, or they may have a bad attitude about foreclosures (also known as REO, Real Estate Owned).

You can do some of your own research on houses that are available. If there are a lot of foreclosures in your city you can probably find a Realtor who is a specialist in selling REOs.

Some places to look for REOs include: http://www.mortgagenewsdaily.com/wiki/REO_Database_List.asp. Some of the bigger lenders on this page with a lot of inventory are Countrywide and Wells Fargo. The Wells Fargo link appears to be broken, so just type in "Wells Fargo REO" in Google, and it should take you to Premiere Asset Management, who sells Wells Fargo's REO properties. Fannie Mae also has lots of houses, follow their link on the same page. Downey Savings has a lot of houses in California and other western states at: http://www.downeysavings.com/ffs.

HUD always has inventory in most places, their page is at: http://www.hud.gov/homes/index.cfm. HUD to me isn't always the best place to look, for several reasons. A lot of their places are fairly ugly, the utilities are usually off so you have to get them turned on to check anything, and they are always sold by closed bid. Plus, for older houses there is often a hassle with dealing with lead based paint, etc. Important to deal with, but they seem to go overboard. In my experience many other lenders are easier to deal with than HUD, although now and then you can get a great deal on a HUD house.

There are various "Foreclosure" sites that you can pay a fee to belong to, but the above sources, plus the Realtor.com site, will have almost all of the houses that are actually for sale. A lot of the "Foreclosure" sites list pre-foreclosures, houses which aren't actually for sale, since they usually list Notices of Default and so on. In a rapidly falling market, you can usually get a better deal with fewer hassles on a house that the bank has already taken back, a house on which they are prepared to a big beating on.

Inspections

Almost all REO houses are vacant, so checking out cosmetic issues is usually no hassle. However, it is especially important to check that everything is working, since it could have been months or even a year or more since the house was occupied.

It's wise to call the local gas company (if the house has metered natural gas) and ask when the gas service was last on, if it is currently off. Many jurisdictions require a gas pressure test on the gas line if the gas has been off for a certain length of time (often a year). If the gas line fails to hold pressure, time for a new gas line.

Furnaces, air conditioners and plumbing are very important issues with any REO property. Be sure that any inspector flushes the toilet and runs a lot of water down the drains to be sure the sewer line is working properly. If the house has a basement, a sewer line replacement can be extremely expensive.

If the water and electric are off, you'll normally have to get these on before you can check everything. It may be a little expensive to do all this, but it's a lot cheaper to know everything up front than to be surprised down the road.

Dealing With Lenders

When buying a REO, the lender is the seller, and in many cases they can be easier to deal with than an owner-occupant.

For starters, the house is always vacant when you close! Some homeowner-sellers have trouble getting moved out by the closing date, this isn't a problem with a lender.

Often when owner occupants move out, you find things you didn't know about since their furniture concealed certain defects. In a vacant REO house, there isn't anything in the way to conceal anything.

If you do your inspections properly and there isn't any vandalism, you get the house in the same condition as when you inspected it. Many homeowners will leave their property in different condition than you thought it would be left in. The lender won't take light fixtures, appliance, etc with them, whereas sometimes a homeowner will.

When you find an REO house you want to make an offer on, the offer works about like any other offer. You might be able to get a better price if you are willing to accept the home "as is", without the lender making repairs. Even if you do make an offer based on "as is" condition, you will still want to make the offer contingent on inspecting and approving the condition of everything. If you find something that would be very expensive to fix, you just say that you don't accept the property in it's current condition, and either make a lower offer which takes the repair into account, or just drop the deal and look for a different place.

Buying "as is" is relatively easy just as long as you make the offer contingent on the inspection, and get everything thoroughly inspected by people who are qualified. Of course you need to make use of all the other normal contingencies like getting financing and so on.

One nice thing about buying an REO property from a lender is that, to them, it's just a numbers game, and emotions rarely get involved if you make a low offer or criticize something about the house. Some owner occupants get all huffy and get hard to deal with, but lenders almost never do.

It's been my experience that lenders almost always follow through on what they agree to--much more so than owner occupants. Once you understand how to buy from them, it's really cut-and-dried to buy an REO house.

Offer and Counter Offer

It's normal when buying an REO property to make an offer of something less than asking price, and then the seller (the lender in this case) either makes a counter offer, an offer back to you to sell the house at a higher price than what you offered them, or they accept your offer.

There is some contract law involved in this, and I won't get into that, but basically dealing with a lender is a back and forth process, a lot like dealing with an owner occupant. You offer, they counter offer, you counter their counter, etc.

Best not to split hairs too much or dwell on minor issues (you should basically overlook most things that cost under $100 or whatever to fix). If you can save $40,000 or $60,000 by buying an REO, don't get all hung up on things you could handle yourself in a couple of weekends for $400 and a few trips to Home Depot.

Lenders really like dealing with mature people who can handle minor details themselves, and dislike dealing with nit-pickers who make a big deal over every minor issue. If you're the kind of person who has to have everything perfect before you can do anything, best to buy a house from an owner occupant for top dollar.

Unless you just totally love a place and have to have it, it's wise to treat the process objectively, and not get too emotionally involved in the negotiations. If you miss a deal on a great place, relax, there will be another one in a month or two that's maybe even better.

Buying at Auction

If you find a place that is for sale by a lender at auction, you can check out the article I wrote at this web site, "Buying Property at Auction" for a few pointers.

Buying at auction is not that big of a deal, but you have to have steady nerves or you can find yourself paying too much. You need to set a maximum price you will pay in advance, and have the willpower to not go above that. You also have to check out a place closely, since many houses sold at auction are sold "as is", no refunds if it turns out to be a dump. The whole point for lenders selling at auction is to reduce their inventory quickly, so do a bit of homework on the local market to see what other similar REO property is selling for locally.

Realistically, you shouldn't buy an REO property at auction unless you can get it cheaper than other local REO properties are being sold for. There are more uncertainties at auction, and you also normally have to have your financing lined up in advance. Many auctions allow for no financing contingency, so if you can't get a loan after you win the house at auction, you can lose your earnest money.

In a market with a lot of auctions, pricing is also more uncertain, so that's another reason why you have to get a good deal.

Go Out and Practice

The best way to learn how to buy and REO property is to go out and look at a bunch of them.

After you've seen enough, you will develop more of a feel for what is and isn't a good deal in your area.

The other thing you will learn is that there are plenty of houses for sale, and there is no point in rushing to buy something until you find something that suits you. During the bubble many lousy houses were snapped up for absurd prices. Now, taking your time to find the right house at the right price is the best way.