Buying Foreclosures

There are a lot of great deals on the market, but buyers beware: Buying foreclosures is full of pit-falls where an un-experienced buyer can lose a lot of money.

Here are my 8 tips for buying foreclosures

Right now there are over 1.5 million foreclosure homes for sale and more are expected to come on the market soon.

All of these foreclosures provide both opportunities and pit-falls for un-experienced bargain hunters.

Just because you like the house and the prices are low doesn't mean you should make ad-hoc decisions or buy something that isn't right for you just because it’s cheap.

Here are my 8 tips for buying foreclosures to make sure you don't get taken for a ride.

#1. Don't get caught up in a buying frenzy

Everybody under the sun today is buying foreclosures. Over 50% of every home today is some kind of foreclosure...Trustee sales, short sale or REO’s but that doesn't mean you should lose your head when bidding.

Banks put repossessed homes back on the market at what seem like cut-rate prices to get buyers to bid up the price and to quickly sell the house so they can avoid the expense of upkeep, such as property taxes, HOA free, insurance, utility cost, pool maintenance, etc.

With prices as low as they were back in the mid 90’s, this represents golden opportunities but they also attract dozens of buyers who are encouraged by their realtors who bid up the price until these homes are no longer bargains.

Don't get caught up in a bidding war. Instead research your market and carefully calculate what you can afford to buy.

Under no circumstance should you exceed that price. Keep your cool…be patient…another home is just around the corner.

#2. Contact lenders directly

Experienced buyers establish relationships with asset managers at banks.

These relationships may give them some inside information or first crack at new foreclosures before hitting the market.

For example in the case of a short sale it can give the inside edge. If a buyer is pursuing a short sale (buying a home for less than what the current owner owes on his mortgage) you should talk directly to the Banks asset manager.

That way if the short sale is not accepted and the property becomes an REO the asset manager knows you are still interested. It could lead to a quick sale with no competition from other bidders.

#3. Get pre-approved from the lender you want to buy from

For example, if you're going to be buying foreclosures from Bank of America it can help to get a pre-approved mortgage from Bank of America.

Doing so may cause Bank of America to look more favorably on your bid if it's similar to others. They know you will most likely close.

The lender is always looking for a buyer that has the highest probability of closing.

Keep in mind that if you get a pre-approval from Bank of America you're not locked in if other lenders offer you better terms.

You can always change your mind and get your mortgage from any lender you feel will offer you the beast deal.

#4. Consider Fix-Ups when buying foreclosures

Most REO’s are sold as is. The conventional wisdom is that banks will do nothing to the houses before the sale, so what you see is what you get when buying foreclosures.

That can be a serious issue today because so many foreclosed homes are in less-than-mint condition.

Many times the former owners were struggling to pay their bills and may have neglected routine maintenance or they may have trashed the properties before leaving taking the cabinet, counter tops, light fixtures, etc.

You may persuade lenders to fix some of the problems before the sale closes but most of the time banks would rather sell the house for less or to the next available bidder…the buyer who doesn't ask the bank to pay for repairs.

I have in the past provided the lender with a cost for the repairs to have the lender agree to give me a credit at closing for the cost to make the repairs.

* This option may be beneficial because as the home owner you can do the work yourself and save yourself a lot of money.

So be willing to consider a home that needs some work but budget accordingly and if you are not handy, hire a contractor. It may save you money in the long run

#5. Hire a real estate attorney

Once banks agree to sales, they often want to move fast and send you contracts filled up with legal mumbo jumbo that is in the banks favor.

As a result, buyers often do not have the time, expertise or knowledge to figure out all the angles.

My solution is to hire a real estate attorney even in states where home sales are usually completed without one, for example Arizona.

Considering you're making perhaps the single largest investment in your life if you’re a first time home buyer the legal fees are cheap insurance against the risks.

The bank will most likely not make changes to the contract but at least you have someone that can explain all the risk to you before you close.

#6. Wait to make an offer

As a buyer you will be better served to wait before making an offer.

Don’t panic…let the house sit on the market for a few weeks giving other buyers a chance to set the bidding tone. Then jump in.

The agent may tip his hand. Call up the listing agent and ask

when should I make an offer?

What should I come in at?

Keep in mind the listing agent is motivated to sell the property so take everything they say with a grain of salt.

The agent may tell you she has offers at say $189,000 and you should bid a bit higher, or she may tell you the seller wants $195,000 giving you an advantage over earlier bidders.

The longer the property sits on the market the bigger the discount...

When you first start looking only look at properties that have been on the market for over 90 days.

As you find houses you like, offer the bank 75% or 78% of the asking price.

#7. Tour properties with a qualified contractor

With so many REO’s sitting vacant in some cases for over a year, it's essential to go over every inch of the property with someone who knows what to look for, can spot problems and tell you how much it will cost to make all the necessary repairs.

A foundation crack can be a minor problem or a deal breaker and most ordinary home buyers have no way of telling the difference.

An attorney and contractor can be very worthwhile insurance.

#8. Making your offer

When making your offer you have the greatest chance of getting your offer accepted if you have no contingencies with non-refundable money in your offer - BUT I would Not recommend this.

The bank wants to make sure that the buyer they choose to go under contract with will actually close.

Once the bank selects a buyer they lose all the other buyers interested in buying the house. They just move on to the next best house.

Your job through your realtor is to let the bank know you will close if they go under contract with you.

With my offers I include a business bio, proof of funds and a letter from my lender stating how much they will lend me.

* I also have the lender include in the letter that they have toured the property which tells the bank my lender is serious about lending me the money to close.

* Now you might want to include personal references, a bank statement showing your down payment money and a commitment or pre-approval letter from your lender.

I would suggest you include an inspection contingency. The lender will know you’re serious if in your inspection contingency you include that you as the buyer will pay to connect the water and electricity on the property.

This will do two things:

First, it shows you really want to buy the house.

Second, it will allow your home inspector to really do his job.

If you want to learn more about buying foreclosures, go to Foreclosure Auctions, to find out the 6 steps to buying at auctions

Do you have a question about buying foreclosures? Ask HERE!

Return from Buying Foreclosures to HOME