Tips on Purchasing a House in Foreclosure
The great American real estate bust resulted in millions of foreclosures. If you are considering buying a foreclosure, here are a few tips to make the most of a potential bargain – and to avoid a potential pitfall.
Investigate the condition of foreclosures very carefully
Many have deteriorated simply because nobody is maintaining them. Others might have been damaged by angry former owners, or stripped of appliances and woodwork.
Hire a qualified home inspector
You want them to carefully go over the structure to be sure it is worth fixing up.
Compare the asking price of the foreclosure
Compare not only to other ‘undistressed’ homes in the neighborhood, but also to other foreclosures nearby. The fewer neighboring foreclosures, the less of a discount you are likely to score by buying a foreclosure.
Nasty surprises might be lurking the paperwork pipeline. Unpaid taxes, liens, homeowners’ associations fees in arrears…these are just a few examples of the nasty financial surprises that might emerge during or after the sale.
Thoroughly explore the history of the property before committing to buy it.
If you're looking to purchase a house in foreclosure to get a discounted rate, be sure to check out Forsalebyowner.com to see foreclosed on houses as well as other houses on sale by owner at a discounted rate.
Foreclosure – A mortgage lender has the right to take back a house if the borrower – i.e., the homeowner – doesn’t pay the mortgage. When the borrower stops paying the mortgage, the lender will start foreclosure proceedings. Depending on state law, this can take two months to two years.
REO – Real Estate Owned.
Who owns it? The lenders, typically, banks. Banks are not in the business of owning real estate. They are in the business of making money by lending money and charging interest. But when a borrower can’t pay back the loan, the bank gets the property and, thus, owns it. Banks sell the real estate they own, often at a steep discount, to unload these nonperforming assets from their balance sheets.
Short sale – A lender-approved sale of the house for less than the mortgage.
When the value of a house falls below the amount of the mortgage, the loan is ‘underwater.’ For example, if the house was purchased for $150,000 with a $130,000 mortgage, but the house is now worth $120,000, the homeowner might want to be rid of the house and the obligation to continuing paying a loan more than the house is worth. To get the bank to agree to take, say, $115,000 to call it quits on the mortgage, the borrower has to prove that he or she is having trouble paying off the loan. Without proving “financial hardship,” it is difficult to get bank approval for a short sale.
Underwater – When a homeowner owes more on the mortgage than the house is worth, he or she is ‘underwater’ on the loan. For example, if the house was purchased for $200,000 with a down payment of $5,000 and a mortgage of $195,000, but the house is now worth $175,000, the loan is $20,000 underwater…and the homeowner has lost all the equity represented by his $5,000 down payment.