How to Buy a Foreclosed Home
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If you happen to get in to a conversation about the right time to buy a house with a real estate broker or agent, the one answer which you will invariably get is that ‘now’ is the best time to buy a house. |
Be that as it may, the truth is that with the number of homes going in to foreclosure hitting record numbers across the nation, rising inventories and property prices at their lowest in the last decade or so, it is true that it’s a great time ‘now’ to buy a home for much less than what its really worth, or what you might have to pay for it in a few years, or even next year.
But finding a foreclosed home up for sale, and then making sure all the paperwork is legit, is easier said than done. For starters, you’ll get a better deal if you manage to buy the property before it goes into auction, since bidding drives up the price and a post-auction sale will obviously be costlier than the initial offer.
If you do manage to find an about-to-be foreclosed home, the next step is to check all the paperwork and make sure that there are no hidden liabilities or pending payments which you would be responsible for. Title companies, real estate agents, and lenders will usually have all the necessary papers and you need to find someone whom you can trust, who could go through all of it and make sure that you what you see is what you get.
Mike Mueller, on the Lenderama mortgage blog, relates the story of a couple in California who wanted to get hold of a bargain and attended a trustee sale. Their $40,000 bid won them a three bedroom, 2 bathroom house which was valued at around $480,000. They spent additional funds on home improvement. After a couple of months, they received a Notice of Default. As it turns out, what they bid on in the auction was the Second Trust Deed. The house was abandoned, heading to foreclosure. It had a first and a second mortgage. They paid $40,000 for the second - but the first was still in place and tied to the property. Now the owner of the first mortgage was foreclosing on the property to recover the unpaid balance of the note.
I cite this example (I’m sure there are lots more) to hammer home the point that dealing with a foreclosed home is a tricky situation, and if you do not understand the documentation, bring in a professional and make sure that the bargain remains a bargain, and does not turn in to a colossal mistake which can destroy your life savings.
It’s not uncommon to get a foreclosed home for around 15 to 20% of its market value. The best way to find foreclosed and abondoned properties is to first make use of online realty websites like Realtytrac (www.realtytrac.com), which has a searchable list of properties based on zip code, to locate homes which are on the market. Second, do your due diligence and visit the property in person. It’s always better to get a first hand look at what you’re getting for your money.
Next, acquire copies of available documents related to the property and run them by a professional and trusted real estate advisor. This could be a broker, lender or simply someone you know who regularly makes real estate investments, and as such, is familiar with house purchase and mortgage contracts and terminology. More importantly, this person will know the right questions you need to ask to make sure there are no hidden pitfalls unmentioned in the contracts.
Done properly, you could buy a foreclosed home today, spend some more on renovation, rent it out for the interim, turn around and sell the house in 2 to 5 years when the market stabilizes and end up pocketing well over a 250% profit.