Joan Jensen, president and CEO of The Central Credit Union of Illinois, offers some valuable guidance on buying a foreclosure by first determining the differences between making a good buy or saying good-bye to a foreclosure property.
Three Stages of Foreclosure: There are three stages of foreclosure where you can buy a property.
Good Buys
Pre-foreclosure: These homes are in the foreclosure process. Typically, the owners owe more on the homes than what they are worth in today's market. Because the homes are worth less than the mortgage balance, buyers often have to negotiate a deal with multiple parties. These include the owner of the property, the lender for the first mortgage, and possibly the home equity lender and the private mortgage insurer. These deals can be very time consuming to finalize and they may not be the best deal in today's market because everyone is still hoping there will be no losers in the deal.
Sheriff's Auction: These sales can have very attractive prices, but they are very dangerous ventures. Often the house is not available for inspection, and it may need many expensive repairs. When there are so many homes on the market available for inspection and quick sale, a sheriff's auction is usually not the best way for a non-professional to purchase property.
Best Buys (for most home owners)
Repossession:These homes are lender owned and sometimes called REOs-"real estate owned". Usually, a repossession went through a sheriff's auction, but was not sold at that time. Repossessed homes are available for inspection helping the buyers avoid any nasty surprises. These properties also come with a clear title-no taxes to pay, no liens on the property, no tenants to evict, and ready for immediate possession. A buyer only needs to negotiate with the financial institution owning the property. Usually, the bank is motivated to sell quickly. Homes are often sold for 5% or more below market value. Some may even sell for as much as 40% below market. So, if you are interested, be prepared to move quickly. Some repairs may have been made by the bank, but the properties are usually sold "as is". So, thorough home inspections are critical. Some banks will also help arrange favorable financing to qualified buyers.
BEFORE YOU BUY
Arrange financing first: Get your pre-approved for a mortgage before you shop. If you purchase a bank owned property, you may be able to arrange a better deal. But, getting a pre-approved mortgage before you shop lets you know how much you can spend and what your payments will be. This will also help speed up the closing process and give you credibility as a qualified buyer.
Location, location, location: Research the location before you hunt for a home. A better location may be worth additional money. Know the price of comparable homes in the neighborhood.
SAY GOODBYE IF
Neighborhood is declining: Widespread foreclosures, high crime rates, or homes in obvious need of repair are signals to look elsewhere. These neighborhoods may be headed for further declining home values and are best left for professional, long term investors.
Vacant for a long period of time: Homes vacant for long periods of time may have neglected maintenance and need costly repairs. Something as small and simple as a slightly cracked pipe behind a wall can go unnoticed for months, eventually causing a big mold problem. And dried out plumbing seals on unseen pipes can lead to an ugly list of costly refurbishments.
Home needing major costly repairs:New carpet and paint are manageable. But, homes needing major costly repairs are riskier purchases and best left to professionals. Often the major repairs and the problems they bring are underestimated and take deep pockets to fix.
Bidding frenzy: If an auction type atmosphere develops, say good-buy. Don't get emotionally caught up and pay too much. There is always another home to buy.
