What to Look for When Buying A Foreclosure
If you are interested in buying and/or investing the foreclosure market offers abundant opportunities. Foreclosure filings for May 2008 were up 48% compared to the same time last year. The record number of foreclosures has made it easier than ever for even the beginning homebuyer or investor to purchase. Take the time research and explore the various foreclosure listings currently on the market; you will probably be pleasantly surprised at the number of distressed properties that meet your specific desires.
Once you have explored the foreclosure listings and have narrowed down your search to a few potential homes, the next step is to determine how much you should offer for the property.
Foreclosure property value will depend on several factors:
Reservation Price
Setting a reservation price and sticking to it is the key to making foreclosure offer. A reservation price is the highest price you are willing to pay for the property and is not necessarily market value. When real estate market is a “buyers market” you should be able to purchase the property for less then your reservation price. The first offer should be markedly less then your maximum, leaving you space to negotiate.
Property Value
In order to set your reservation price you should research the area to learn everything about the current market. It is important to look at the original purchase price of the property, as well as how it stacks up against comparable properties in the area. Also, review recent sales in the neighborhood to better determine the current value of the distressed property.
Loan Amount
Before making an offer, research a property in foreclosure thoroughly. An important piece of information you need to determine, particularly relevant if you are hoping to buy the property in a pre-foreclosure phase, is the total amount due and the remaining loan balance on the property. At a minimum, you are going to have to find out exactly how much is needed to settle the debt owed to the lender. Another aspect you need to determine is whether any liens or taxes are levied against the property in addition to the homeowner’s loan.
Performing Home Inspection
REO and pre-foreclosure homes are often available for inspections. Foreclosed homes being sold at an auction sale are generally not available for inspection. Whenever possible it is highly recommended that you try and schedule a thorough inspection of the property prior to submitting an offer. If possible, consider bringing a realtor or contractor along with you on your inspection of the property, they may be able to provide suggestions on what types of repairs and improvements would offer the most return on your investment. Inspections allow you to assess the current condition of a property, and determine how much you may need to budget for performing repairs and improvements. This generally has a major impact on a buyer’s budget and is often either miscalculated or under-estimated when buying distressed properties. Be sure that you have a solid handle on the amount of money it will take to bring the property up to your standards for occupying or reselling. If unable to thoroughly inspect the home before purchase you can always drive by the property of interest. The condition of the exterior and yard will give you insight into what condition the home might be on the inside. A view of the neighborhood will also give you an idea of the value of the home. It is always prudent to allow a generous rehab time and have money set aside for any unforeseen construction costs. You are bidding on a property in “as is” condition.
Title Search
If you purchase a pre-foreclosure or a foreclosure at auction, it is important that you thoroughly research the property and perform a title search as early as possible. Make sure that the property is free and clear of any bankruptcies, tax liens and other financial liabilities that can potentially cloud ownership to the property. Most liens recorded at the County Court House predating the mortgage being foreclosed on, continue to be obligation for the new property owner. Mechanics and other liens recorded after the foreclosure process begins may be extinguished by foreclosure, but IRS and municipal liens are not extinguished. You can do a title search yourself by performing a thorough search of property records at the County Recorders Office or hire a title company to handle the task for you. The added bonus to having a competent title company perform the search is that you can purchase a title insurance policy that gives you added protection to safeguard your interests.
Realistic Offer
Whether you are dealing directly with a seller in pre-foreclosure, bidding at a foreclosure auction sale, or making an offer on an REO, you need to make a realistic offer on the property. All too often, new investors interested in buying foreclosures enter the process with the misperception that the seller or bank is desperate to sell and would consider taking any offer to rid themselves of the property. While it is true that you can often find foreclosure deals ranging anywhere from 5 to 25 percent off market value, deeper discounts are rare. You may only have one opportunity to make an offer on the property. Make sure that your bid is not only realistic and reasonable, but also grounded in solid research and facts.