BUYING A FORECLOSURE PROPERTY IS GOOD OR BAD IDEA - Smart Investor - An investment in knowledge pays the best interest

Saturday, July 11, 2020

BUYING A FORECLOSURE PROPERTY IS GOOD OR BAD IDEA

Buying a foreclosed property is not at all bad idea and more over it can be tricky. Since you are not able to take a tour of the premises before actually investing in it, there is always a possibility that you might end up paying a hefty price for it. So, it is always advised not to follow the process blindly. It is always better to be cautious about an investment than be sorry about it.

What is a foreclosure?
Foreclosures happen when a lender takes a property from an owner who has defaulted on their mortgage and has fallen behind on payments. Lenders, in turn, will try to recoup as much of their investment as possible by selling a foreclosed home for slightly less than it might be worth.

5 steps to buying a foreclosed home
Here are some tips to prepare you before buying a foreclosed home:
  • Find an agent specializing in foreclosures.
  • Do not invest if the property is vacant for long
  • Plan your budget carefully
  • Bid competitively
  • Bid higher if other foreclosures are selling fast.
  • Be prepared to buy a foreclosure in “as-is” condition.
  • Get a pre-approval letter

Find an experienced real estate agent:

Before initiating the purchase, reach out several real estate agents and find the one whom you feel comfortable to connect with. Banks generally hire real estate brokers to look after their properties. Consequently, there are many such agents who might have worked with the banks on previous deals. Browsing through the list of foreclosure listings can give you a fair idea of the properties in your locality, and an agent can actually give you an insight about the deals that are about to come!

Hire an agent who is knowledgeable about the foreclosure process to represent your interests and will keep the transaction moving. One strategy for finding the right agent is to visit websites with a database of foreclosed homes in your desired area. Look for Realtors who have specialized real estate training in this area, such as the Certified Distressed Property Expert (CDPE) or the Short Sales and Foreclosure Resource (SFR) designations.

If you find an agent you want to work with to buy a foreclosed home, ask them to look out for foreclosure properties that meet your criteria. These listings can go fast, so be prepared to move quickly.

Do not invest if the property is vacant for long:

You must consider the amount of time the house has remained vacant. In majority of the cases, it has been found that longer the duration, the more the damages. The assets, including the plumbing, electrical, and air conditioning systems tend to depreciate over a period of time. The property, after a certain time, becomes more of a distressed property that would require major renovations.

Plan your budget carefully:

While investing in a foreclosed property, always keep in mind the additional expenses that you might have to bear. Carefully assess all the repairs and renovations that you want to make and enumerate the expenses accordingly. Before finalising the agreement, make sure you know the prevalent prices pertinent to plumbing, electrical, and other major repairs in the market. This, in turn, will help you avoid generating negative cash flow in the future.

Bid competitively:

While competing in a foreclosure, fix a limit for yourself keeping in mind your budget, the amount of additional expenses, and the means of financing that you would want to avail. An important point of consideration here is that the bank that is selling the property will not provide finance for the same. Therefore, you need to have your options in place beforehand. There are basically two things that you should always keep at the back of your mind. Firstly, the bank is not emotionally attached to the property and has no irrational expectations regarding the price. Secondly, the institute is losing money for every day the property is put on hold. 
Bid the higher price if other foreclosures are selling quickly
There’s no exact formula on what the bank’s bottom line will be, so if foreclosed homes in your area are selling quickly, it’s important to work with your agent to craft a strong offer, backed up by your preapproval letter. In many instances, foreclosures are already discounted so an offer that’s too low might be a non-starter for the bank.
Keep in mind that the type of house and location matter, and some homes might sell faster than others. In competitive markets, you might need to offer asking price (or slightly more if there are multiple bids) and keep contingencies at a minimum.

Be prepared to buy a foreclosed home in ‘as-is’ condition:

When purchasing a foreclosure, the property is usually sold in “as-is” condition. This means that the seller can’t guarantee the property’s condition, such as whether it has termites, structural issues or lead paint, for example, and is unlikely to make repairs.
Since a foreclosure is owned by the bank, there is no one to fix any current issues.
Get a home inspection if you plan to buy a foreclosed home so you know exactly what you’re in store for. A home inspection isn’t required to buy a home, but it can identify major issues the bank isn’t aware of so you can decide whether to move forward with your home purchase — or to walk away from the deal if you included a home inspection contingency in your contract.

Get a pre-approval letter:

Unless you can afford to pay cash, you’ll want a mortgage pre-approval letter in hand when you make an offer on a foreclosure.
“It separates the lookers from the buyers,” he says. Pre-approval letters detail how much money you can borrow, based on the lender’s thorough assessment of your credit score and income.
Find a mortgage lender who understands your goals, and gather the necessary paperwork to obtain a pre-approval letter.
It’s always good to be prepared, Having your proof of funds will make it an easier transaction.

Is buying a foreclosed home a good idea?
Buying a foreclosed home is a personal decision and it depends on a variety of factors, including your risk tolerance and potential reward, financing and ability to move quickly. You could reap big savings if the foreclosure is priced right, so don’t discount this type of listing in your home search. 
  1. Financial gains
  2. High return on investments
  3. Early due diligence
  4. Lower mortgage payments
How to buy a foreclosed home: Get a loan or pay in cash?
Foreclosures tend to get scooped up by real estate investors who often pay in cash. Don’t let that discourage you; many lenders will help you find the right financing to buy a foreclosed home. If you’re up against cash offers, though, make sure your offer is a competitive one.

Your lender will require an appraisal to assess the home’s value so keep that in mind when making your offer. If there’s a shortfall between your offer and the home’s appraised value, you may have to make up the difference in price if the bank (the seller) doesn’t budge.



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