Buying a foreclosure property requires a little inside knowledge and courage and a lot of due diligence and common sense. There are several different ways to buy a foreclosure and each has advantages and disadvantages. This article offers tips for buying a foreclosure property that beginners often learn in the school of hard knocks.
You may buy a foreclosed property at various stages in the foreclosure process. Before a foreclosure officially happens, the homeowner already knows it is imminent. You might find this homeowner and offer to buy the home at a reduced price before the situation progresses to an actual foreclosure. There are creative methods investors use to locate homeowners who are behind on their mortgage payments. One such way is by placing classified ads in print or online media. The ad might read, "Behind on your payments? Call me for a quick cash sale! (000)123-4567." A second way is to establish a good relationship with local real estate professionals. They may notify you if an opportunity arises. Many homeowners try to sell beforehand in order to save their credit rating, recoup at least something from their investment and avoid the embarrassment of a foreclosure.
Once foreclosure proceedings have officially begun, you may still be able to bargain with the homeowner and the bank to pay equity to the owners and take over the existing loan, or get a new loan. If the foreclosure continues its course, it may culminate in a sheriff's auction or a bank sale. The bank sale is usually handled by a real estate brokerage, while the auction offers properties for sale to highest bidder.
Auctions represent opportunities for bargains and pitfalls. Buying a home sight-unseen is never a good idea. That's because homes sold at auction are usually sold "as is." This means the buyer assumes all responsibility for repairs, known and disclosed or unknown and undisclosed. A helpful suggestion is to personally inspect the property before committing to buy and retain a professional home inspector if at all possible. Home inspections are allowed with bank sales.
Individuals and bankers are not the only ones with foreclosed homes. Uncle Sam has foreclosed properties for sale as well. The Department of Housing and Urban Development (HUD), Department of Veterans Affairs (VA) and Federal Housing Agency (FHA) list foreclosed properties for sale on the official government websites. These residential and commercial properties are usually sold through an approved real estate broker in a bidding process. You may find anything from multifamily apartment buildings to farms and single family residences. From time to time, cities, counties or local government agencies may have residential and commercial properties for sale as well. As with most foreclosure properties, they are sold "as is," so be aware that the buyer is responsible for repairs.
Position Yourself for Success
Getting preapproved for a loan positions you to take advantage of opportunities that arise more quickly than those who learn about the opportunity and then go through the approval process. Save time and give yourself an edge over the competition with a preapproval in hand.
Don't underestimate repair costs or go blindly into a sale without a home inspection. This is a common mistake for beginning investors. If the termites quit holding hands, guess who is responsible for the house falling down? The buyer.
Perform due diligence. Check into the neighborhood's home values with local real estate companies and the tax office. Is the home located in an area with many foreclosures? If yes, watch out because home values may fall still further. Do you intend to live in the home? Drive through the neighborhood at night to see what it's like. Check to see if there are any zoning issues. If you're buying this home as an investment, then you probably want it to hold its value or rise in value, rather than to decline. You might have to hold a property with negative equity a long time to recoup your investment.
Finding a Silver Lining
Buying a foreclosure is not just for investors. The reduced price of most foreclosures may benefit individuals and families who otherwise could not afford to buy a home. This period of deflated home values may be the only opportunity some families will ever have to realize the dream of homeownership. This is one positive note than any Pollyanna could cheerfully sing. The downside is that someone lost this home to begin with. It was their dream and that dream has now ended.
There is an old saying, "when one door closes, a window will open." If it was a case of negative equity, the homeowner who lost the home may very well find a better opportunity somewhere else with creative financing techniques. Even with a bad credit rating, there are options for struggling families. One option is simply to rent until things get better. They are rare today, but Old VA and Old FHA loans allowed buyers to assume loans without qualifying. Owner financing is an option for those with bad credit, as is rent-to-own or lease option. If you lease a home with an option to buy, you may find a bank later on that is willing to treat a new loan as a "mortgage refinance." The mortgage refinance product usually has less stringent terms (read that "easier to qualify") than a new loan.
In conclusion, buying a foreclosure does not have to be an experience of one person losing while another wins. It can be a win-win situation for all parties, when ingenuity and due diligence prevail.