BUYER TIPS - How to know if a Foreclosure is a Good Deal

Let’s see...you have enough cash or credit and you want to get a great deal on a property that has been foreclosed, but first, there are some things that you would want to know before buying a foreclosure.

Before anything else, let’s define what is meant by the word foreclosure. It is usually called real estate owned (REO), and it is a property owned by a bank or lending institution. This happens when the previous owner of the property has stopped paying mortgage for it, due to unforeseen circumstances and hardships. As a result, the lending institution (Wells Fargo, Chase Bank, Bank of America, etc.) has legally repossessed and taken ownership of the home. It will then be listed for sale by a local real estate sales professional (link to dana email address) in the Multiple Listing Service (MLS) along with other listings whether they may be traditional sales and/or short sales.

Just so we’re clear - What we’re discussing are not properties that are sold through a foreclosure auction at the county courthouse. We’re talking about properties that are owned by a lender and are for sale through the traditional listing methods - the MLS.

A Foreclosure is NOT a Good Deal When:

The best deal may not necessarily be the property in a specific area with the lowest-price. It will not be a good deal if the property is located where there are a lot of other properties for sale, or if there are many vacant properties in the area.

A property may not also be a great deal if it needs lots of repairs, even if it’s the lowest priced in the area. It certainly should not be a run-down home, unless you’re a contractor or other real estate professional. Another deal to watch out for is if the property is a condo or a house in a new subdivision that is only half sold out; or properties that can only be bought for cash - because no bank will finance the purchase.

There are several things that can go wrong with a real estate purchase. You may believe that you are getting a pretty awesome deal. In reality, there is always a reason for a property to be priced really low. You may not even be able to figure out what that reason is until after you close escrow. At that point, it may just be a little too late.

What Makes a Foreclosure a Good Deal?

When you are about to purchase a foreclosure, ask yourself these 5 very important questions:

1. DO I love the property?  

This is what you should ask yourself after you’ve visited it, viewed it, and investigated the property fundamentals. You love it because it is very close to exactly what you were hoping for in becoming a homeowner, or rental property owner.

2. DO I plan to own his property for a long time?

Take time pondering on this one. It is important for you to remember that the break-even point in ownership is about five years, even if you think that this is a really great deal for you. If you’re not planning to own it for at least that long, I suggest you should just consider renting.

NEVER forget the three most important words in real estate: long-term ownership.

3. IS the property in pretty good shape?

When friends ask about the physical condition of the property, you should already be able to answer their question. The fact is, a large number of home buyers do not really have a clear idea of how much it costs to renovate and make repairs to a property. Renovations usually cost a lot more and take a lot longer than one would expect; it would be best to leave those fixer- upper homes to the contractors.

4. IS the price of the property in line with comparable recent sales in the neighborhood?

You should be able to figure this out when you or your real estate agent does a comparable market analysis of nearby properties. If a deal seems as if it’s too good to be true, most of the time it usually is.

5. ARE most of the nearby houses occupied?

It doesn’t matter if the properties in the area are occupied by owners or renters; neighborhoods with many empty houses and buildings in them can become very bad areas with very low home values. Avoid that type of risk.

Research the Property; Confirm Your Suspicions

In order for you to confirm and be certain that the foreclosure you want to purchase is a great deal,  you need to do the proper due diligence during your buying process. This is very true because REO’s do not commonly come with the traditional seller disclosures of any material issues that are wrong with the property.

Before you sign, review comparable market sales, get contractor estimates, compare mortgage rates, and view at least 5-10 other homes so you will be able to know what the market has to offer. You should also review the HOA financial and legal condition and the title report for any issues as well as keep the proper amount and type of dwelling and liability insurance in place. Taking these steps to reduce your risk is key to making sure what you buy is really a good deal.

 In a nutshell, when purchasing a property, whether it’s a foreclosure, or short sale, or even a traditional sale, what you, the prospective buyer, want to do is to buy the best quality of property that you can afford, in a good neighborhood, that you will be living in for a long period of time, and will make you happy. Ask anyone: It is always better to pay more for a better quality, lower risk property. This may just be the biggest and riskiest purchase you will ever make, so I urge you to please make a wise choice with the purchase.

In closing, I want you to know that the prices on real estate properties nowadays are usually very fair; so is the financing. It is really a good time to buy a home now – as long as you’re implementing what I discussed above. Please do avoid being impulsive and think things through; that great steal you may be thinking about, may sometimes not be the best deal for you. Remember it’s not just the price that counts.

My website has complete and comprehensive information about foreclosures and short sales, and how you can purchase one.  So if you are looking to buy a foreclosure, or want to know more about REO’s and short sales, don’t hesitate to call me, email me, or visit my website today. I am here to help you, and answer all your questions.