Across the country, foreclosed properties come up for sale all year long. Sometimes the deal is a great one, and sometimes the buyer is ripped off. Follow these tips to get the house of your dreams- not of your nightmares.
1. Be Brutally Honest About Your Budget
If you have a budget of $60,000, and spend $58,000 buying a property only to find out it needs $30,000 in repairs to be livable, you’ve sunk yourself. It’s no fun to buy a house, and then have to rent somewhere, work two jobs just to repair it enough to live in it.
Figure enough of your budget that you can set aside for repairs if needed. Perhaps you can do the work yourself, hire a contractor or people from work or church.
2. Beware of “Too- Low” Mortgage Payments
The housing market is full of buyers who purchased homes under such ads as, “Only $1,400 a month for a $500,000 home.” What they failed to find out was that those payments were temporary. The minute the “low” period was over, they were hit with payments they couldn’t make, lost the home, and now owe tens or hundreds of thousands of dollars.
Call the lender and ask questions. If the person doesn’t seem eager to answer, hang up and move on. Look at the lender’s website- read the whole thing. Read all the details, especially the fine print, even if you need to hold a magnifying glass to the screen. Now, that alone should send up a red flag or two.
I checked out one website whose ad promised the same payments as mentioned in this tip. Four e-pages of details later, I found the catch. The payments were for three years only, and the rest of the money was due as a balloon payment. That means all the money, all at once. I doubt the majority of people who signed up for these mortgages had that kind of cash on hand.
3. Look at the Property Yourself
If you’re in the same town, go to the property yourself and look at it. Even if the gate is locked, you can still get a good idea from the outside whether it’s been taken care of or not.
Pay attention to the neighborhood. The owner may have abandoned the property for safety issues. Wrecked cars, trash, unkempt yards, all point to trouble. Pass on this property.
If buying online, don’t trust the picture. Hire a local real estate agent to go to the property, take pictures and evaluate the neighborhood. If the agent won’t go into the neighborhood, that’s a good indicator. The expense is minimal compared to the alternative.
4. Ask About the Property’s Condition
The seller shouldn’t have a problem giving information about how long the house has been empty, whether it has undergone repairs, maintenance or any damages. A house that has been empty for a while could have problems with the plumbing when the water is turned on. Seals and washers can dry out in toilets, sinks and faucets. Preparing for water leaks ahead of time saves cash and headaches.
If the landscaping is overgrown, grass and weeds can grow up under the sheathing, causing damage to the walls. Termites and carpenter ants find this setup particularly inviting.
Hire a private property inspector to take a hard look at the place. He or she is trained, licensed and bonded to do the job right. The seller will turn on the utilities at their expense so the inspector can check the pipes and wiring. They will also give an honest assessment of the property’s value, which could vary from the selling price. This could give you a fair-sized bargaining chip.
Expect to spend between $300 and $500 for the inspection.
5. Consider a HUD Foreclosure for Your First Home
Even though it may sound like a “low-class” house, HUD homes are maintained by the Government. Buyers who pledge to live in the homes after the sale are given the first opportunities to bid on the property.
If the houses don’t sell after a pre-determined period, the sale is then open to investors. It’s still a good idea to apply the other tips before buying any property.
6. Consider Buying a Short Sale
If a friend or relative is facing foreclosure, a short sale could help you buy your first home at a bargain price. It’s also a way to help a friend or relative keep a roof over their head- only you would own the property.
A short sale is basically buying the house from the mortgage company for the remainder of the loan, which could be lower than the property value. The buyer could also make an offer for less than the outstanding amount. The lender has to agree to the sale, and part of the contract is that the former owner owes nothing more.
The sale is an “as-is” sale. If there is damage to the house, or repairs needed, the new buyer assumes it all.
This type of sale is best done through a real estate attorney, who will make sure all the paperwork is in place for the protection of all parties involved.
7. Don’t Get Caught In a Bidding War
If you’re at an auction and several people are bidding on the property, be careful. Some people go to auctions to drive up the bidding price, something that most auctioneers try to discourage.
Only bid what your budget will allow- if you didn’t get that house, there are others. Do your homework before going to the auction and have a list of houses you would like to have. Make a priority list in case you don’t get the first one.
8. Obtain a Pre-Approved Mortgage Before Shopping
Sit down with a lender and get a pre-approved mortgage from a respected lender. Make sure it only goes into effect- that is, you don’t make payments before you buy a property.
This allows you leverage when talking to sellers when looking at a house. In the case of a short sale, it could make the difference.
9. Be Honest On Loan Applications
Okay, here’s a biggie. Deliberately lying on a mortgage application, such as income, debts or other information is fraud. Mortgage fraud is a felony in all 50 states.
There is nothing to be gained by lying on a loan application, losing the house and facing prosecution on top of it.
So you can’t afford the house of your dreams right now. Buy what you can afford, make the payments, and when the market is right, sell at a profit.
10. Consider a “Fixer”
Here’s what I did. In a neighborhood of $75k and $80k houses, my house stood out. I fell in love at first sight. During the first walk-through, it was evident why the price tag was $56k. The house had been a rental, and the renters didn’t treat it well.
I looked at the damages as bargaining points. In the end, the seller replaced the water heater, fixed the flooring, replaced screen doors, repaired the enclosed porch and dropped the price to $53,500. I made the place mine.
Renovating both bathrooms, fixing up all four bedrooms and landscaping the huge backyard has been a joy and a pain over the last 20 years. I am close to paying the mortgage off now, and the house next to me with three bedrooms sold for $99k a few years ago.
My best advice: Take your time, budget for inspectors and a real estate attorney who will work for you. Home ownership is not for the faint of heart, and home buying isn’t either.
Source: Jeanne Baron, “9 Tips for Buying a Foreclosure,” This Old House Website, no date given
Source: Les Christie, “7 Tips for Buying Foreclosures,” CNN Money Website, 19 November, 2009