House hunting can be a very daunting experience, especially in today's real
estate market. Both investors and home buyers have been priced out of the
market by escalating costs, and good real estate deals are increasingly
difficult to find.
But there are bargains out there, for people who know where to look.
Online sites give consumers access to foreclosure and pre-foreclosure information that was previously available only to professional real estate brokers and investors. Today, homebuyers can use these services to assist them identify and research potential home purchases, as well as the tools and professional resources they need to help them close the deal.
1. Learn about the different types of foreclosure properties, and the foreclosure process.
There are three basic types of foreclosure properties, representing different stages in the foreclosure process: notice-of-default (NOD) and notice of trustee sale (NTS), which are both pre-foreclosure properties; and real-estate-owned (REO), a foreclosure property which has been re-purchased by the bank.
For most consumers, buying a pre-foreclosure property from a private homeowner is the best option. Itís important that both the buyer and the seller see the situation as a win-win situation, in order to ensure a smooth process. In this case, the seller is able to get out from under a mortgage without destroying their credit rating, the lender is saved the time and expense of foreclosing on the property, and the buyer gets a below-market price on a home.
Foreclosure auction sales are typically the domain of the professional investor. These properties are formally in default, and sold to the highest bidder at an auction. Buyers are required to be physically present at the auction, and must pay 100% of the sale price in cash, on the spot. Though foreclosure auctions can offer significant savings, they are not for the feint of heart or the uninformed. Unless the buyer is already familiar with a particular property, there is usually little time to examine it. And the buyer will be competing against professional investors - and sometimes even the lender - at the auction.
Once the lender officially reclaims a home, it becomes a real-estate-owned property (REO). While REO properties typically offer more time for evaluation and a more standard bank-managed transaction, their prices are usually very close to full retail market value.
2. Secure financing early
It's important for a buyer to be pre-qualified before engaging in discussions with a seller. This ensures that the buyer is in a financial position to purchase the property, and is in the strongest possible position to negotiate. It's best to work with a lender who understands the foreclosure process, and can guide the buyer through certain steps, such as ensuring that a property is FHA-compliant. Another reason to consider pre-qualification is that not all lenders finance foreclosure properties. Having approved financing in-hand makes negotiations with both the seller and the lender easier, and may even make it possible for the buyer to simply cure the default and take over the existing loan to reduce loan processing fees.
3. Engage a real estate agent as a "buyer's representative"
Most people hire a real estate agent to sell their home. These "seller's representatives" are charged with making the sale and negotiating the best deal for their clients. "Buyer's representatives" have the home buyerís interests at heart, and are charged with finding the right property and negotiating the best price for their clients. Picking the right real estate agent will make a buyer's life much easier. There are agents who specialize in the foreclosure market, with specific experience in REO properties. Look for an agent with foreclosure transaction experience, as well as knowledge of local, regional and state laws. But it's also important to consider the agentís knowledge of the area; their ability to close a deal; and their access to other professionals (attorneys, lenders, mortgage and title professionals) to ensure that the buyer is in good hands.
4. Do your homework
Stocks offer higher potential returns for investors than traditional savings programs, but are also riskier. Similarly, purchasing foreclosure properties is somewhat more risky than buying traditional real estate properties, but offer much higher potential savings. With the right examination and due diligence, buyers can significantly reduce the risks. It makes sense to give any property under consideration a thorough examination. Here are eight steps for doing a professional-level exam.
-Identify desirable neighborhoods. Identify specific neighborhoods where you'd like to live or own a home. This will limit your search to a manageable size for you and your real estate agent, and give your a sense of relative property values.
-Cast a wide net. There are a number of online services that can put hundreds of thousands of foreclosure properties at your fingertips. Since the best savings are often found in pre-foreclosure properties, it's important to check the percentage of pre-foreclosure (vs. REO) properties in any database before subscribing.
-Determine the property value. Look at the original purchase price, and recent comparable property sales to determine the current value of the property.
-Find out the amount in default and the remaining loan balance. In order to determine a reasonable offer price, you'll need to know, at a minimum, how much money it will take just to satisfy the debt to the lender.
-Run a legal investing report. Before purchasing any foreclosure property, make sure it is free and clear of any bankruptcies, tax liens or other financial liabilities.
-Assess the condition of the property. If at all possible, visit the property, ask your realtor's opinion, and review pest and structural reports to make sure that the property is in acceptable condition, or to determine how much of a rehab budget you'll need to build in to your deal.
-Build a positive relationship with the seller. Before purchasing the property, try to make sure that you're entering into a win-win situation with the seller, so that they'll do what they can to make the process easier and leave the property in good condition
-Leverage your timing. Knowing when a property is going to be auctioned gives you an extra bargaining chip when negotiating with the seller or the lender.