The Great Unknown in Buying Foreclosure Property

What’s Behind Door Number Two:

Make money quick! Invest pennies on the dollar! NOW is the time to buy up foreclosure properties! Your buyers see these sort of messages all the time, but is it really the right thing for them? Buying foreclosures can be a bit like gambling on a game show: What’s Behind Door Number Two?

Over the course of the last few years the foreclosure market has heated up and buyers have taken note. There are many investors that specialize in purchasing foreclosure properties, but should your client be one of them?

According to Bobbi Dempsey, co-author of ‘The Complete Idiot’s Guide to Buying Foreclosures’ (Alpha). You can buy a distressed property when it’s in one of the following phases:

* Pre-foreclosure – the homeowner still has control of the property.
* Auction sale – you may be bidding against lenders.
* Real estate-owned (REO) – a lender-owned property.
* Government-owned – potentially a slower process with more paperwork.

There are many points to consider, and to make sure your client considers, prior to purchasing a foreclosure property.

#1- What does your buyer’s credit look like? Buying foreclosure property can be more competitive than other homes as many investors and buyers hoping for a deal will be in the mix. These homes are not usually good for government loans (FHA or VA) due to their condition, so your buyer will need a higher downpayment. If your buyer hopes to be the winner, they need good credit.

#2- Is your buyer prepared to take on an “as is” property and all the repairs and upgrades that entails? Foreclosed properties can have a variety of needed repairs and the lenders will seldom handle the largest ones. See #6.

#3- Is your buyer educated on fair market value? Foreclosure properties are hot right now and as such, the pool of potential buyers is deeper. Sometimes well priced foreclosures are heading into multiple bid situations. Ensure that your buyer knows what the top of fair market value for the property is so that they will not pay more than expected in a “bid off” on the home.

#4- Is your buyer looking to “flip” the property? If so they need to know current market value for the property both as it is AND after their expected repairs are done. They should have a working knowledge of how much average repairs cost and be able to execute the repairs quickly. It is helpful to give them a market analysis for the home in the condition it will be in when “flipped”.

#5- Understand your client’s timeline and educate them on how long purchasing a foreclosure can take. This is not your average six week sale time line, in many cases. Buying a foreclosure, depending on circumstances, can drag the time line out several weeks over a traditional sale.

#6- Ensure your buyer understands the inspection process and what it means to them. Often the home is winterized with no utilities. Sometimes the lender will de-winterize and turn on utilities for the purpose of inspections, but not always. Sometimes the lender will participate in repairs, but that is not typical.

#7- In many states a title search is a mandated part of the closing, but not all. Ensure that your attorney or title company is thorough in researching the liens and title issues on a foreclosure. It stands to reason that a person that lost their home due to lack of payment was also unable to pay other bills…remind your buyer to do their research prior to the closing.

#8- Your buyers are searching the internet and finding foreclosures that are long gone. Sites like realtytrac.com are popular and useful, but sometimes out of date. I have had several investors call me on properties they “found online” only to research the home and discover it sold months before.

#9- Be sure your buyer is ready to MOVE FAST if they really want to buy a foreclosure.

#10- Prepare your buyer for EXTENSIVE paperwork. There is far more paperwork involved in a foreclosure purchase than a traditional one.

Counsel your buyer that the process of purchasing a foreclosure means more homework, patience and often a good measure of luck. That being said, it can be a terrific opportunity for the right buyers and a chance for both of you to have a hands on turn at correcting the housing market.