RE/MAX CHICO
From Robert Contreras
Robert Contreras, Re/max of Chico / DRE #: 01094252
1834 Mangrove Ave. suite 10, CHICO, CA 95926
(w) 530.896.9358 (c) 530.519.9801
The Secret to Buying a Foreclosure That Isn't a Dud
By: Daniel Bortz

Who doesn’t love a bargain? Nabbing a great deal on a house is every home buyer’s dream. One way to make it come true is by purchasing a foreclosed home.

The caveat? Buying a foreclosure isn’t like buying an ordinary house. It’s important to understand what, exactly, a foreclosure is, how to find one, and how to pay for it.

Here are some crucial questions to ask yourself before purchasing a foreclosure.

What is a foreclosure, exactly?

When a property enters foreclosure, the homeowners' mortgage lender repossesses the house for lack of payment (i.e., the homeowners defaulting on their mortgage) and then sells it, to recoup some of its money. Foreclosed homes are sold at a public auction to the highest bidder, and the buyer can't even go inside before the purchase. If the house doesn’t sell at auction, it becomes what's known as an REO, or real estate-owned property, where the bank looks for a buyer through traditional means, like advertising the property in the multiple listing service (MLS).

Since banks are often eager to unload these foreclosure properties, they aim to break even with an asking price that's typically the sum of the remaining mortgage note, plus interest, lawyers' fees, and penalties. On average, this ends up at about 15% below the home's actual value, enabling home buyers to score a terrific bargain.

Am I willing to buy a home “as is”?

Generally, foreclosed homes are sold “as is,” meaning that the house is being sold in its current condition and cannot be inspected for structural problems, mold, infestations, or other issues before the auction. Buyers of REO properties, though, can perform a home inspection, but the bank usually won’t fix any problems with the house or offer any kind of credit at closing.

Naturally, these conditions can be a deal breaker for some home buyers, says Cathy Baumbusch, a real estate agent with Re/Max Allegiance in Alexandria, VA. “Keep in mind that a foreclosed home sold at the courthouse is bought without warranty, and sight unseen,” Baumbusch cautions.

Can I qualify for a mortgage for a foreclosure?

Financing the purchase of a foreclosed home can be trickier than getting a regular mortgage. Some lenders don't want to fund the purchase of foreclosure homes, especially if the property requires heavy-duty TLC. This forces home buyers to buy foreclosures with all cash, or to find a mortgage lender that is willing to take on some risk.

To qualify for a mortgage to buy a foreclosure, you’ll have to meet the same credit score requirements that apply when obtaining a mortgage for a traditional home.

A credit score of 620 is generally considered the minimum, says Gaurav Mahajan, vice president of residential lending at Draper and Kramer Mortgage Corp. Many lenders, though, are willing to work with applicants with lower credit scores by offering them Federal Housing Administration (FHA) loans, which are available to applicants with scores as low as 580.

Not sure what your credit score is? You can get a free score online at CreditKarma.com. You can also check with your credit card company, since some (like Discover and Capital One) offer a free credit score.

Will I have enough money left over to pay for renovations?

Often, buying a foreclosure means you’re buying a fixer-upper that may require extensive home improvements. Hidden expenses could be lurking beneath the surface, like electrical or plumbing problems. Depending on the house’s condition, you may need tens of thousands of dollars to make these changes.

As a result, you’ll want to have a good chunk of cash in your pocket after the purchase is complete, to pay for home improvements and repairs, so don’t stretch yourself too thin with your offer.

How long am I willing to wait for the sale to go through?

Buying an REO? It can take a while for the foreclosed home to be sold after the bank accepts your offer, potentially several months (as opposed to a traditional home sale, which takes about 30 to 45 days to close).

Why so long? One reason is because asset managers at banks often have backlogs of work, which can make the closing process a lot more time-consuming. It may also be more labor intensive, depending on whether there are liens on the property. Therefore, patience is key.

Bottom line? Buying a foreclosure isn’t a decision to make lightly. It takes careful planning, an honest assessment of your risk tolerance, and finding the right property, if everything is to work out in your favor.



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