Posted Wed Nov 12 05:55AM
Learn valuable tips about buying pre-foreclosure and bank-owned homes in California.
Foreclosures are a great bargain in real estate right now. The only problem is, everyone knows it. So that means the competition is heating up for the best deals. However, if you do your homework and get prepared, you can put yourself in the best position possible to take advantage of some fabulous opportunities to save money when you buy a house in foreclosure.
Here are the steps that I recommend that you take if you want to buy a house in foreclosure:
1. Get pre-qualified for a home loan. This is a very important. From my experience with both pre-foreclosure properties and bank-owned properties, the banks won't even look at an offer that doesn't have a prequalification letter from a lender attached. Knowing what your payment will be before you purchase a house is a smart rule of thumb for everyone, and having a pre-qualification letter will give you greater negotiating power when you're ready to make an offer.
2. Find a lender who is experienced in working with foreclosure sales and understands the requirements and process.The lender you choose is also very important because many attractive loans, including VA and FHA loans, have very specific guidelines. Not knowing those guidelines can come back to bite you once you're in escrow and can even cause your accepted offer to fall out of escrow, sometimes after you've already spent money on property inspections.
3. Make sure you are familiar with the lender's requirements once you've determined the loan that is best for you. For example, most pre-foreclosure and bank-owned properties are being sold "as-is". That means the bank will not pay for any repair work or improvements. But a conflict may arise if you are considering certain loans, such as FHA loans, which allow you to purchase a property for a very low down payment. These FHA loans have health and safety requirements, and are not likely to fund a loan if there are broken windows or carpets in poor condition.
4. Select the area where you want to purchase first. Doing this research ahead of time will help you narrow down your search and help you feel more confident about your decision when you're ready to buy a house in foreclosure. If schools, accessibility to public transportation, nearby conveniences like parks, grocery stores or recreational facilities is important to you - find areas that meet that need.
5. Get a feel for the price of comparable properties in the area you've selected.There are several web sites which offer property value information, although, quite frankly, I haven't found them to be accurate. In my opinion, the best way to determine the approximate value of a home is to pay for an appraisal or get a Comparable Market Analysis (CMA) from a real estate agent. A real estate agent who is knowledgeable about the areas will know the neighborhoods and will have seen the inside of comparable homes within that neighborhood.
6. Gather a list of foreclosure properties that are available for sale.After meeting with a lender, choosing the loan that is best for you, and identifying neighborhoods that meet your needs, you're ready to look for the right property. There are many national sites that provide information about properties in various stages of foreclosure. Most of them charge for this information and, from my experience, offer information that isn't always current. You can get an up-to-date, list of foreclosures which include pre-foreclosure properties and bank-owned properties that are listed on the Bay Area Multiple Listing Service by registering for my site.Use the tools to create an up to date search customized just for you.
7. Don't exclude non-foreclosures when looking to purchase. If a family is not facing foreclosure, yet is still trying to sell a home during this down market, they may be very motivated to sell due to other reasons. If they have owned the home for a while, they probably have a decent amount of equity in it, and may be open to selling at a very competitive price.
8. Find a real estate agent who is experienced in working with foreclosure properties to represent you. As a buyer, there are no direct costs to you for having professional representation by a Realtor®. The seller pays the commission to the real estate agent. With the large number of regulations and disclosures, you'll want to make sure that you're properly informed and protected.
9. Understand the difference between pre-foreclosure and bank owned properties. The list of properties you receive by registering on my website will include both pre-foreclosure and foreclosed or bank-owned properties. It does not include foreclosed properties being sold at auction.In my experience, the bank-owned properties or REOs (the ones that have been through foreclosure and are now owned by the mortgage holder) are the best to consider. Why? Because you get a quicker response from that bank, there's more inventory, the banks are very motivated by this point, and the transaction is typically smoother and faster than an escrow for a pre-foreclosure property. However, if you find a pre-foreclosure (short sale) property that meets your needs, there are some important things you should consider.
o Remember the "Golden Rule."When an owner stops making his loan payment, he will eventually receive a notice of default from the mortgage holder. This situation becomes public record. During this phase, I strongly recommend that you treat the homeowner as you would like to be treated. Be sensitive to the fact that this family is experiencing a stressful situation and more than likely does not want to be approached by strangers. That is why many owners prefer to list their house with a real estate agent who will handle the questions and schedule appointments during the pre-foreclosure stage.
o Learn about Transfer Disclosure Statements. Pre-foreclosure properties that are listed with a real estate agent are required to provide Transfer Disclosure Statements. These three-page statements are signed by the owner and provide information about any known defects or problems with the home, and offer details on items such as the age of the roof. An owner of a pre-foreclosure is not required to sign these same documents if he/she sells the property without representation. Be aware of this if you are considering trying to deal directly with the homeowner.
o Be prepared for a slow process. In making an offer during the pre-foreclosure stage, be aware that the owner probably owes more than the current appraised value of the home. During this phase, the bank is actively involved in reviewing any offers. The bank wants to "cut its losses" and so does the homeowner. If your offer is less than what the owner owes, it is up to the owner to make up the difference. But the owner is hoping that the bank will "forgive" some of the debt that is still owed after the property is sold. All of this creates a lot of paperwork, consideration and negotiation. According to Judy Osborne of First American Title in Santa Maria, pre-foreclosure, or short sales, average between 2-4 months to close of escrow. A large number do fall out of escrow, primarily due to the fact that the buyer loses patience. Be patient, be prepared to respond fast. Judy recommends using a Realtor® to help with the negotiation process, as that seems to be a stumbling block as well.
10. Once you are ready to make an offer, find out if the bank will accept the type of loan you have selected. I've heard horror stories from buyers who paid $350 for a property inspection during the escrow process only to have the deal fall out of escrow because the bank wouldn't accept the loan for which they qualified.
11. Be prepared to negotiate. Obviously, the bank is going to want to get the best price you can on the property, so be prepared for at least one counter-offer. Request the right to have a property inspection and the right to withdraw your offer due to findings from that inspection. Know that the bank will only give you a few days to make an inspection.
12. Hire a professional to do a home inspection once the property is in escrow.
Many banks will provide you with a pest certification. Beyond that, in our experience, the bank-owned properties are sold "as is". The home is vacant so there is no one to furnish you with a Transfer Disclosure Statement. A good real estate agent will help you find a reputable and thorough property inspector to help you understand what repairs you will need to make if you purchase the property.
13. Be prepared for the fact that the escrow process may be different than any you've experience before. I have never seen a market like this. The banks and mortgage companies are not in the business to sell real estate, yet they are inundated with foreclosure properties, creating new challenges for them. If you do your homework and stay patient, you are setting yourself up to take advantage of some very good real estate investment opportunities. Afterwards, you'll be able to point friends in the right direction when they ask you, "How do you buy a house in foreclosure?"
Jason David Maddox
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