Foreclosed homes are everywhere these days. Find out what steps you need to take to purchase foreclosures and leave the closing table with instant equity. This is a great time to buy your own home or investment property. Interest rates and home values are low, continue reading to learn how to make thousands of dollars buying foreclosures.
I will go through the steps of buying foreclosures and some obstacles to expect when buying a foreclosure.
1. Money Source: Be sure to have a money source identified before you begin looking at foreclosures. Know if you will be paying cash, borrowing money from a family member, or borrowing money from a bank. There are several reasons for this, primarily don't waste your time looking at homes you cannot buy.
If you are paying cash, be prepared to have proof of funds available when you make an offer. Most of the time it is a letter from you bank stating that you have a predefined amount of money.
If you are borrowing money from a family member, be sure they have a proof of funds letter.
If you are planning on getting a loan from the bank, get a prequalification letter. There are several loan programs to look into when considering buying a foreclosure. Some of the more popular in my area are conventional loans, FHA loans, and rural development loans. The FHA loan requires the borrower to put down three and a half percent of the purchase price of the home. Conventional loans require five percent and rural development loans do not require a down payment. Be sure to check with you local lender about the options available to you. There are several of them out there depending on your needs.
2. Find a reliable way to search for foreclosed homes: Being a Realtor, I am biased to finding a good real estate agent and having them send you foreclosures as they come on to the market. There are several other ways to search if you prefer not to use a real estate agent. I would recommend spending time on state tax records. Every state should have a website that allows the public to search tax records. In Arkansas it is http://www.arcountydata.com, in Texas it is http://www.txcountydata.com, Oklahoma is http://www.okcountydata.com. Seeing a trend? Not every state is the two letter abbreviation with county data after it, but several are. If you cannot find it, you can always Google the state and public tax records and you should find it. Find the areas you want type in the streets and go down the list looking for banks listed as the owner. Once you find which bank it is, you can try to contact them to find out the price of the property. One more thing about public tax records is the majority of the time you will be able to see what the bank paid for the home. This is a huge advantage when making an offer. Another option for finding foreclosures is using the internet to find them. I would recommend finding a local real estate website that offers a foreclosure option. We offer a free list of Foreclosed homes in Little Rock on our website. Most local real estate offices offer foreclosure lists as well. You can also use nationally recognized websites to find foreclosures. Sites like www.realtytrac.com, and www.realestate.yahoo.com are another way to find foreclosed homes. I would not recommend them because they often lag in the homes that are available and sometimes do not show accurate details. You can also try and search large asset management companies online. A couple of them are cityside corp, and homepath.com, there are several others available if you search online.
3. Do a preliminary viewing: Once you have found a couple that you like, do preliminary viewings. Be sure to do them quickly after you find the ones you like, good deals don't last long. Drive by the home, look in the windows, have a real estate agent open it up. On this first viewing, take in everything that is going on, bring a camera for pictures. Is the area nice? Are there other foreclosures in the area or on the same street? Does the home have and major red flags? Cracked foundation? Appearance of water drainage issues? Steep inclined driveway and all other driveways on street are flat?
Pay attention to everything that cannot be fixed or would be costly to fix on this first visit. If nothing looks too bad, start focusing on the other repairs. Try to take note of what will need to be fixed. Then later you will be able to check prices for repairs. Another advantage of taking notes of needed repairs is you can have a professional come out with you the next time if you are not knowledgeable about the repair.
4. Have a market analysis done: Once again, I recommend a good real estate agent for this. What you want is a complete list of the homes that have sold within six months and are in the same area as the one you are interested in. Most appraisers like to stay within a half mile if possible. Be sure to get a complete list of the homes that have sold. This is the part where an honest and knowledgeable agent is important. You don't have to make the call; you have a professional that will let you know if it is a good deal. Unless you trust who you are working with get all of the homes that have sold and you be the judge. That puts the ball in your court. You will be able to view the sold homes and what features they have to see if they are comparable to the one you are interested in.
5. Make an offer at the home on the second showing: If the market analysis numbers show the home to be a good deal, visit the home again and have an agent bring a contract. If you are not using an agent, I recommend that you visit the home again before you make an offer. It is good to see it again to be sure of what you are doing and to be sure there was nothing you missed on the first showing. Remember that the bank hardly ever does repairs. That is your responsibility when buying a foreclosure. If you still want to make an offer, remember what the bank paid for the home on tax records. Also, look to see how long they have owned the home. Foreclosures are considered bad assets to banks and the longer they have them the more they want to get rid of them. We always recommend to make the offer twice as low as what you are willing to take. If the home is priced at 200K and you are fine with buying it at 180K, make your first offer 160K. You want to see where the bank is and if they are willing to negotiate.
6. Prepare to wait: Once you have made your offer, the wait begins. Sometimes they will get back with you the next day and other times it may be a week or two. Don't be surprised if the counter offer they write is not on a state contract. Most of the banks have their own addendums for offers. They cut straight to the point. Normally a single sheet of paper that states exactly what they are willing to do. Be prepared to pay earnest money, every foreclosure I have done has required it. The initial counter offer will give you a good idea of where they want to be. Sometimes they will come down further, but the majority of the time they tend to stick close to the counter offer. If they will not come down to a number that you feel comfortable with, wait a week or two and then write another offer. After enough time, they tend to be more willing to negotiate. I am going to move on to the next step assuming you have reached an agreement on the purchase price.
7. Inspection then appraisal: This is the part of the process where most deals fall through. Most banks will give you anywhere from 7-10 business days to do a home inspection. I recommend hiring a professional, but you can do it yourself if you feel comfortable. Be sure to check the attic, crawl space, septic system, and everything else. If you are doing it yourself, I would recommend going online and finding a home inspection checklist. This will give you an idea of what a home inspector would check when going through the home. Any needed repairs from the inspection should wait until after closing.
The appraisal is the part that can become tricky. You will have to pay your lender for the appraisal. Be sure to ask for a copy of it when they are done. If you don't ask, they will not give it to you. Now the tricky part, different loans have different requirements that an appraiser will look for. Click on the link for a list of FHA guidelines. If you are going with a different type of loan you should be able to search online for the guidelines. Don't be surprised if the home does not meet the guidelines. That is where the dilemma comes in. What do you do if there are appraiser required repairs, but the seller will not do any repairs? First, I would recommend getting something in writing explaining which repairs are required. Then submit the list to the selling bank. If they still are not willing to do the repairs you have a couple of options. Try to switch to a loan that does not require the same repairs. Move on and begin to look for another home. There is also the option of doing the repairs prior to closing. I don't recommend this especially if the repairs are costly, but sometimes you have to do what is needed. I don't recommend it, because you are spending money fixing a home that is not yours yet. Recently many banks have left buyers no choice; banks will not do the repairs so the buyer has to.
8. Closing: If the repairs are taken care of and you want to proceed the next step is closing. By the way, after appraiser required repairs are done expect to pay the appraiser a re-inspection fee. If you are bringing money to the table be sure to get a cashier's check or money order. Some title companies allow personal checks, but most don't. The closer will call you to let you know how much to make the check out for. I would recommend looking at or having your real estate agent look at the HUD-1 statement before getting the check. I have seen several of them have mistakes on them. Another good reason to try and find a good real estate agent that is knowledgeable about what they do.
9. Post closing: Once you have closed on the property, the world is your oyster. You can do repairs to live in the home, rent the home out, or try to sell it again. I would lean towards the first two in this real estate market. Interest rates are low; you should be able to live in the home fairly cheap or rent it out and make some profit every month. If you do choose to resale the home, be aware of the HUD flipping guidelines.
I hope this article has been informative to those considering buying a foreclosure. It was intended to give people an idea of what to expect when buying one. Different states have different processes, you should check with a local professional before pursuing a purchase. There can be several obstacles that come about along the way, remember to be patient and stay informed about what you are doing.
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