While the housing market is recovering from the big housing bust of a few years ago, foreclosure homes continue to come onto the market in high numbers. The foreclosure starts, which had started to trend downward through 2012, have been ticking up again as of February 2013. With more than a million homes in foreclosure at any given time, you can certainly find some great cheap real estate foreclosure deals – but you have to know how to separate the great deals from the lemons. This information can help you find and get good deals on cheap real estate foreclosures.
Know the Types of Sales
There are several types of foreclosure sales, and each of them have different customs and rules, so it’s important to understand the differences in the markets. The three most common types of foreclosure sales are foreclosure auctions, short sales and REOs, or “Real Estate Owned,” which stands for bank-owned. Most experts recommend that novices steer clear of foreclosure auctions and tread carefully with short sales. REOs offer the best opportunities and protections for buyers.
What’s the difference?
Short sales are generally the last step a property owner takes when trying to avoid foreclosure. In a short sale, the bank agrees to accept less for a property than is owed on the mortgage. Getting a short sale approved can be long, complicated and involved – and there are no guarantees that the bank will accept the offer at the end of it.
Foreclosure auctions, also known as trustee auctions, are generally held at the courthouse in the county where the property is located. These homes have been foreclosed upon, so the former owner is no longer party to the sale, so you’ll be paying the bank/banks that now own the mortgage. A foreclosure auction can be the best place to get a really sweet deal – at least as far as purchase price is concerned. You can also get burned very badly by undisclosed problems, which can range from title problems and IRS liens (which you will have to pay off) to owners and tenants still living in the property. Unless you’re an experienced buyer, most experts recommend that you steer clear of trustee foreclosure auctions.
REO foreclosures are properties that didn’t sell at the trustee auction and are now owned by the banks. While some people see these as the “leftovers,” there are some very good reasons for choosing REO sales rather than buying a property at a foreclosure auction. In general, the banks don’t want to be in the business of owning real estate. The longer that foreclosed home sits on their books, the more money they’re losing on it. In order to sell REO foreclosures as quickly as possible, banks typically clear any liens against the title and expedite the sales as much as they can. Home buyers are much less likely to run into costly title problems with an REO foreclosure than with a trustee auction.
Weeding Out the Dreck
Now that we’ve got some basic definitions down, here are five tips for foreclosure buyers from expert real estate investors.
No. 1: Stick with REOs.
Yes, we said it above, but it bears repeating. In addition to the reasons listed above, there are a few other reasons to consider. REO sales are the closest in process to traditional home sales. In short sales and homes facing foreclosure auction, you may have a difficult time getting a good inspection of the property because the previous owners are often still in residence. Also, with foreclosure auctions, you’ll usually be expected to pay the entire amount of your purchase price in cash at the close of the auction. With REOs, you’ll typically go through the standard mortgage process. Finally, lenders usually hire real estate agents to show their REO properties and allow entry for home inspections. And, if that wasn’t enough, REO foreclosure properties often offer the lowest prices you’ll find on the market. That’s partly because they are likely to be in the worst condition, but because the bank isn’t emotionally invested in the property, they’ll often be willing to give even more on the price.
No. 2: Inspect Properties Thoroughly
REOs are nearly always sold “as is” with a disclaimer that the owner has no knowledge of the property and has not lived in the property. These homes have generally fallen into foreclosure because the former owners were strapped for cash, so there’s a very good chance that they haven’t been maintained well. They may need anything from cosmetic repairs to major structural repairs. Always bring in a professional home inspector to go over the property with a fine tooth comb and give you a list of every potential problem. Get estimates of how much the problems will cost to fix and use the list as a tool to negotiate the price down further.
No. 3: Get Your Financing in Line
Foreclosure real estate sales often attract multiple offers, so if you’re not prepared to move fast, you risk losing the property you want. Get your financing set up before shopping to cut the approval time on your mortgage. Before you start looking, check your credit score, fix any credit problems and put together cash for a down payment, then get pre-approved for a mortgage. That way, when you find the house you want, you’ll be ready to make the purchase.
No. 4: Hire an Experienced Buyer’s Agent
Unless you’re experienced in navigating the foreclosure sale process yourself, a good buyer’s agent can offer you invaluable help. Look for a Realtor with a Short Sales and Foreclosure Resource certification from the National Association of Realtors or a real estate agent with a Certified Distressed Property Expert designation from the Charfen Institute. You can also find lists of buyer’s agents who specialize in foreclosures and short sales at the Charfen Institute or RealtyTrac websites.
No. 5: Know Your Market
Research into your local foreclosure market can give you a lot of insight into the local scene. Check with real estate agents and online sources to see how much of a discount you can expect, how quickly properties are moving and how much you can expect your investment to appreciate in the future.