What to Consider When Buying a Foreclosure

If you haven't seen the abundance of for sale signs with the a "foreclosure" sticker or sign rider, you've been under a rock for the past couple of years.  These days, foreclosures have been commonplace in every neighborhood, from $80,000 homes to $1M+ homes.  The public is getting increasingly savvy in purchasing foreclosures because after all, they really aren't that much different than purchasing a standard resale home, with a few minor twists. 



How to Find Foreclosures
The days of tirelessly tracking down foreclosed properties are gone.  Nowadays, Realtors are happy to have foreclosed homes as listings, as it means increased traffic from smart buyers.  If you're using a Realtor (and I obviously recommend you do), they should have tools at their fingertips to weed out foreclosures and should be able to produce a list for you within a few minutes.  If they say they can't, you might want to try someone else.  If you aren't using a Realtor, the internet is your best tool.  Search for your desired area, and look for the words "foreclosure" or "REO".  On top of that, there are specific websites that you can search government foreclosures:  Hud Homes, HomePath Homes, and HomeStep Homes.  All of these have simple, easy to navigate websites to find a foreclosed property.

Financing Your Foreclosure
Keep in mind, your lender will be using the foreclosure as collateral, should you not be able to pay your mortgage, at least they will have a reasonable asset to cover the amount owed.  That being said, there are some homes that are in just awful shape.  When using government backed financing like FHA and VA loans, they are unlikely to loan against homes in poor shape.  They have strict guidelines to protect their collateral, but if you're able to use FHA/VA financing, the down payment is much less.  Conventional lending requires a larger portion for down payment, but they are less strict with the properties they'll lend against.  There are trade offs for each type of financing.  Speak with your lender or mortgage broker for more information on financing your foreclosure purchase.

Writing the Offer

Chances are when buying a foreclosure, you're looking for a great deal in exchange for having to do a little work on the home and jump through some hoops with the paperwork.  Foreclosures are typically priced to sell and are most likely at or just below market value.  One question I hear often is, "Can we negotiate on price with the bank?"...Of course you can, consider the bank another faceless seller in this situation.  The bank will most likely always counter your offer, but don't fret, stay strong.  If it's the perfect house for you, take it, if not, write an offer on another foreclosure.  Along with most counteroffers, the banks are most likely to include an addendum that protects themselves.  Mainly, it reiterates that the home is being sold "as-is" which means that the bank is unlikely to pay for any repairs.  The addendum will also lay out what they expect from you, should you accept their counter.

Negotiating the Transaction 
I mentioned that the bank will drive home the fact that the home is being purchased "as-is".  That is not always the case.  Should your inspection uncover some issues that are mandated by state law, or a health/safety issue, you may have the opportunity to have the bank pay for those issues to be cleared up.  If the problem is too big, then walk away.  Please don't buy a money pit.  Similarly, if there is an issue that the appraisal finds that would prevent your lender from loaning against the property, the bank may end up paying for that as well.  

Closing
After all the hoops have been jumped through, and all the due diligence performed, you'll be headed to closing.  Closing can be extended or delayed because sometimes banks move a little slow or need a signature on some paperwork that was missed.  My advice: roll with the punches.  You're getting a relatively nice home at a great deal.  You can't beat that!