BUYING REAL ESTATE FORECLOSURES 3/E
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This often involves removing appliances and fixtures, and sometimes even outright vandalism. Along with unforeseen repair and renovation work, delinquencies such as back taxes and liens which auction properties often have attached to them, either by the IRS or state or other creditors can add further costs to an otherwise desirable house.
Whatever is owed, the government must first be paid and settled before the buying process can go forward. This applies mainly to properties being auctioned off; a bank will always pay off any liens attached to the property before reselling it to another party. The preceding complications often mean lots of paperwork. If it's a short sale situation, the owner's lender has to approve the deal and that can take a while, as mentioned earlier. Serious damage found in the house can result in a lower home appraisal , which may affect the buyer's ability to secure a loan.
While you'd think a bank would be eager to unload a repossessed residence, response times between the bank and other involved parties can be sluggish with REO properties too. The amount of time that it takes to get a response on your bid can vary widely; if the bank that holds your property is swamped with foreclosures, then it can take a great deal longer for the bank to process your request. Banks with substantial backlogs have been known to take up to 90 days to respond to an offer.
If you plan to finance the purchase, you'd be wise to spend the time obtaining preapproval for a mortgage. As with any market, whenever there's a chance to acquire something at a discount from the going rate, demand will soar. So increased interest and competition — not just from potential occupants but from investors and flip professionals — are inevitable when dealing with worthwhile foreclosed properties.
Very often, a foreclosed home can be priced attractively below the other homes in the surrounding area, but when word gets out, numerous offers can come in rapidly and a bidding war ensues. So what was once an under-priced home in a great neighborhood can rapidly become a costly property. Prospective buyers of foreclosed homes may be wise to submit bids on several properties at once, because it is possible for competing buyers to secure a property with a higher bid or an all-cash offer.
But don't get discouraged if someone else trumps your offer for a particular property; check back periodically to see if it reappears in the bank's inventory. Foreclosure deals tend to fall through quite often.
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If buying from a bank, you'll need to sharpen your bargaining skills and start the process with a lowball offer on the property you want. Banks that have accumulated sizable inventories of foreclosed properties will be more inclined to negotiate on price; the longer that the bank has held the property, the greater the odds that it will seriously consider lower offers, especially on properties that have been held for longer periods of time. In fact, cash deals represent a sizable portion of REO sales. You can use a mortgage to buy a REO property, though private lenders tend to be skittish about financing foreclosure deals.
However, two financing options are available for those who qualify — k loans from the Federal Housing Administration FHA , and the HomeSteps program through Freddie Mac, one of the government-sponsored enterprises that repurchases mortgages.
The FHA designed its k mortgages to help assuage the concerns of banks that would otherwise shy away from high-risk REO. For borrowers, one of the big advantages is the ability to finance the home purchase, plus any required repairs, in a single mortgage. With more extensive fixes, such as building an addition or taking care of structural damage, a traditional k loan is usually the best option. Additionally, you have to pay for an independent consultant to inspect the property and verify that the work meets program guidelines.
An additional drawback to these loans is the price.
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Besides paying mortgage insurance, borrowers typically pay interest rates that are a quarter of a percentage point higher than those on conventional loans. Figure 1. A comparison between traditional k loans and the streamlined version. Freddie Mac provides liquidity to the mortgage market by buying loans from banks, pooling them and selling them to investors as securities.
With HomeSteps, the organization — through its private lending partners — offers special financing for those who want to buy only the foreclosed properties that it owns.
If you happen to live in one of these states, HomeSteps has some significant benefits. That alone can save buyers hundreds, even thousands, of dollars over the course of the mortgage. Buyers can find a list of single-family, condo and multi-family properties on the HomeSteps website. On the surface, foreclosed homes can seem awfully appealing.
However, costs can be extremely unpredictable and underlying damages could make a property undesirable. A safer choice is to buy homes that are owned by a bank. These properties, often referred to as REO or real-estate owned homes, have already been through the foreclosure process, with banks having taken them over. Banks will often sell these homes at prices below market value to get rid of them. The best news for buyers is that banks are required to pay off any liens filed against these properties. Buyers can also hire home inspectors to tour the homes before they buy them. These inspectors can help buyers determine how much they'll need to spend in repairs.
Buyers can then calculate whether a particular foreclosure is a bargain or a potential money pit.
A foreclosed home can present a savvy investment opportunity under the right circumstances. Do your homework, and you might just come away with a diamond in the rough. Disclaimer: The links and mentions on this site may be affiliate links. But they do not affect the actual opinions and recommendations of the authors. Wise Bread is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.
There's a stereotype that all HUD homes are run-down and need repairs, but when I worked for HUD, there was always a large selection including very new and nice homes that are move-in ready in great neighborhoods, all sold for less than they're worth. You'll have to find a HUD-registered real estate broker to place a bid, but you can at least see the house before bidding, and cancel the contract penalty-free if an inspection reveals problems.
Our house was a bank-owned former foreclosure. It worked out well for us, but we did our homework and we kissed a LOT of frogs on the way! Buying a bank-owned house takes some time to find one with the right things wrong with it. About Contact Advertise. Credit Cards Personal Finance. By Dan Rafter on 18 March 3 comments. Return to Zillow. When a lender loans you money without any collateral credit card debt, for instance , it can take you to court for failure to pay, but it can be very hard to collect money from you.
Lenders often sell this sort of debt to outside collection agencies for pennies on the dollar and write off the loss.
A secured loan is different because, although the lender may take a loss on the loan if you default, it will recover a larger portion of the debt by seizing and selling your property. So what happens in a foreclosure? The specifics can vary according to state law, but we can break it down into five stages.
It all starts when the homeowner — the borrower — fails to make timely mortgage payments. There are several options to help keep you in your home. The foreclosure process costs the lender a lot of money, and they want to avoid it just as much as you do. Depending on state law, the lender might be required to post the notice on the front door of the property. This official notice is intended to make borrowers aware they are in danger of losing all rights to the property and may be evicted from the premises.