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What to Know Before Buying a Foreclosed Home

If you’ve been keeping your eye on real estate home listings, you might’ve seen more foreclosed properties for sale at a reduced price. 

With record levels of unemployment and underemployment, many homeowners are falling further behind on their mortgages. Currently, there’s a federal moratorium on the most common mortgage programs through December 31, 2020. Unless further homeowner protections are in place, the foreclosure market will see an unfortunate rise.

In fact, according to mortgage and real estate analytics company Black Knight, 2.3 million homeowners are already seriously past-due on their mortgages. 

As devastating as it is to have more homes undergoing foreclosure, it also means that prospective home buyers, who were otherwise priced out of buying a home, might have greater access to homeownership. Here’s what you should know if you’re thinking about buying a foreclosed home.

Buying a Foreclosed Home 

There are many ways you can buy a foreclosed home, depending on what stage of the process the foreclosure is in:

  • Pre-foreclosure. Many homeowners are willing to sell before they’ve officially been foreclosed on. Depending on how much equity they have, they might need to do a short sale. 
  • Short sale. Homeowners can seek approval from their lenders to sell you the home for less than they owe on the mortgage. The bank will get less than it’s owed, but it still often approves short sales since they usually cost less than a foreclosure. 
  • Auction. Once a home is foreclosed it’ll often be auctioned off by the bank. But you’ll need cash on hand for this, and that’s not an option for most folks who need mortgage financing. 
  • Real-estate owned (REO) properties. Alternatively, banks can simply sell the foreclosed home through more traditional markets, just like a normal home.

It’s usually easiest to buy the foreclosed home once the bank takes over and it becomes an REO property. That’s because you can take your time and go through the mortgage underwriting process. You can also work with a realtor, and — importantly — write contingency clauses in the contract that let you pull out of the deal if a home inspection reveals more repairs than you expected. 

7 Caveats to Buying a Foreclosed Home

Buying a foreclosed home isn’t exactly the same as buying one directly from the homeowner. You’re potentially buying a home from a bank who took over after the previous homeowners were unable to afford the home anymore. This introduces a few twists into the home-buying process for you. 

1. You’ll Need a Realtor Who Specializes in Foreclosed Homes

The world is full of realtors, even including your Uncle Bob and Cousin Carolyn. But not everyone is equipped to handle the nuances of buying a foreclosed home. There are a lot of issues that can crop up — unplanned property damage, squatters, homeowners who settle the bill and try to reclaim ownership, etc.

If you’re serious about buying a foreclosed home, seek out a realtor with extra experience in this area. There are even special designations that some realtors can get, such as Short Sales and Foreclosure Resource (SFR) or Certified Distressed Property Expert (CDPE).

2. Houses Are Sold “As-Is”

With a typical home sale, you have the change to get the property professionally inspected before signing on the dotted line. It’s not uncommon for new issues to arise, and in a normal home buying transaction, you can often negotiate with the sellers to either fix the damage or discount the price. 

That’s not the case when you buy a foreclosed home. If a home inspection reveals unexpected damage — like the need for a full roof or a septic system replacement — banks often aren’t willing to negotiate. It’s a take-it-or-leave-it sale. 

3. Expect to Put In Some Work

The above point is especially important considering that most foreclosed homes do, in fact, need a lot of fixing up. 

Think about it: the previous homeowners lost the house because they couldn’t afford the mortgage. There’s a good chance they also weren’t able to keep up with routine maintenance either. From their perspective, even if they did have the cash, what’s the point of spending money on repairs, if they know they’ll lose the home in a few months?

You can save money by putting in some sweat equity (HGTV, anyone?), but even then you’ll need the cash to pay for materials. This also means that the home might not be move-in ready. If you do move in, you might need to put up with construction debris for a little while. On the bright side, though, this does give you a chance to upgrade the home to your own aesthetics. 

4. You Might Need Creative Financing

This brings up another issue: how do you pay for those renovations? Generally, you can’t just ask for a bigger mortgage to cover the necessary repairs. Most lenders will only lend you as much as the current home appraisal is worth, minus your down payment. 

You have a few options, though. You can hold some money back from your savings to pay for it in cash, but this means you’ll have a smaller down payment. An alternative is getting a loan from a different lender, like a personal loan, a 0% APR credit card, or even a home equity loan or line of credit if you’re lucky enough to start from a position with equity. 

Finally, there are some special “renovation mortgages” available through Fannie Mae and other lenders. These mortgages actually do allow you to take out a bigger mortgage so you can pay for renovations. You might need to provide a higher down payment or have a higher credit score to qualify, however. 

5. Watch for Liens on Foreclosed Homes at Auctions

If you have a big pot of cash and can pay for a home on the same day, an auction might be your best bet. But then you have to worry about a new factor: liens. 

If the property had any liens attached to it (such as from the previous homeowners not paying their taxes, or a judgement from unpaid debt), you’ll inherit that bill, too. 

This is usually only the case for auctioned homes. If you buy a foreclosed home as an REO sale, the bank generally pays off any liens attached to the property. Still, it may be worth double-checking if you have interest in a specific property. 

6. Be Prepared to Act Fast

You’re not the only one with the bright idea to get a low-priced, foreclosed home. Chances are good that there are a few other buyers interested in the property, which increases competition. Even though the home is listed at a big discount, this competition can still drive prices up. You might need to be ready to act fast, just the same as in any hot real estate market. 

7. Be Prepared to Wait

On the flip side, there’s a lot of extra bureaucracy involved in buying a foreclosed home once the seller accepts your offer. There’s often extra paperwork to fill out or other complications. 

For example, the home appraisal might come back lower than expected, which might make it harder to get enough financing for the agreed-on purchase price. If it’s a short sale, it might also take longer for the bank to approve the lower sale price for the home, based on what the homeowner’s mortgage is currently worth. 

Pros and Cons of Foreclosed Homes 

Buying a foreclosed home isn’t necessarily a good or bad idea on its own. It all depends on your own goals — for example, are you willing to figure out financing for repairs to get a deal on the home purchase price? Also consider how important it is for you to have a “move-in ready” home with no hassle. 

Weigh these pros and cons carefully, and what’s most important to you when buying a home. 

Pros Cons
Can get a deal that’s lower than market price Property is sold “as-is” and might not be move-in ready
Can customize the home to your specifications with repairs and upgrades Likely needs a lot of repairs and upgrades 
Requires creative financing for repairs and upgrades
Foreclosure process is long and might fall through 

The Bottom Line

Buying a foreclosed home can be a win-win situation. You get a home at a good price, and (usually) you can bring the property back to good, working order by fixing it up. As long as you go into the deal knowing that it’s not the same experience as a typical home purchase, buying a foreclosed home is a great way to launch into homeownership or real estate investing.   

The post What to Know Before Buying a Foreclosed Home appeared first on Good Financial Cents®.

Source: goodfinancialcents.com



Why 2 Finance Experts Still Struggled To Buy This House

home buyerTony Matheson

Think two seasoned certified financial planners would have an easy time buying a house? Tony and Barbara Matheson would beg to differ.

In fall 2019, these empty nesters found themselves itching to downsize from their large rental in the uaexpensive San Francisco Bay Area. Hoping to buy a reasonably priced house within walking distance of restaurants and other amenities, they set their sights on Sacramento, CA. Armed with a healthy income, solid credit history, and a deep knowledge of personal finances—plus they’d owned property before—they figured they would sail through the home-buying process.

Six months and three lost bidding wars later, they realized that Sacramento’s real estate market was far more cutthroat than they’d imagined.

In March, the Mathesons finally purchased a three-bedroom, one-bathroom 1926 Tudor on a tree-lined street. With the closing papers signed, they figured they were home-free—but COVID-19 was about to throw another curveball into the picture.

Here Tony shares their story, and his hard-won lessons for aspiring first-time home buyers and others who want to learn what buying real estate is really like today.

Tony Matheson House
Tony and Barbara Matheson’s new home in Sacramento, CA

Tony Matheson

Location: Sacramento, CA
House specs: 1,225 square feet, 3 bedrooms, 3 bathrooms
List price: $550,000
Price paid: $580,000

Why did you decide to move?

We’d been living in the Bay Area and were looking to downsize since both of our kids had moved out. We wanted to be near downtown Sacramento, close to restaurants, bars, museums, and coffee shops.

I’d think home buying would be a breeze for two finance pros. How did it go?

I was really surprised by how tough the market was. After five months touring homes, we made an offer on our first house. This house went into a bidding war; we had to raise our bid five times before tapping out.

Next, we fell in love with a second home. This time, we offered the sellers $30,000 over the asking price. The sellers had so many other bids, they never even bothered to counter our offer.

We found a third home, and once again bid over the asking price. But after five tries, we lost out again. It was heartbreaking.

How awful! Why do you think these homes sold to other buyers?

We came prepared with what most consider strong financials for making an offer on a single-family home: great credit scores, a significant down payment, pre-approval for a mortgage. We offered good earnest money and 15-day escrow, didn’t include an appraisal contingency, and probably had a few other bonuses to the seller that I’ve forgotten. So we were doing everything “right.”

What we were finding is that we were up against some other buyers who were making all-cash offers, sometimes $50,000 above the asking price. How does anyone compete with that?

So how did you finally get an offer accepted?

We were extremely fortunate that we had a great real estate agent who was able to find a home that hadn’t been listed yet. We could negotiate one on one with the seller without having to compete against multiple offers.

The sellers had planned to invest $30,000 to $40,000 on home improvements before putting it on the market. We offered to buy the house as is, without the improvements. After going back and forth a few times, the sellers took our offer.  

What did you like about this house?

We knew within 5 seconds of walking into the house that this was the one. It was the perfect neighborhood. We were close to everything, within walking distance to plenty of bars and restaurants. The outdoor area is gorgeous. Beautiful trees surround our house, and the house is the perfect size for us.

Living Room
The living room of Tony and Barbara’s Sacramento home

Tony Matheson

So once your offer was accepted, what happened next?

The sellers weren’t prepared to move immediately. They needed time to prepare. So we rented the house back to the sellers for a month after closing. We closed on Valentine’s Day, but we didn’t move in until mid-March.

Little did we know what was about to happen.

Tony's home
Tony and Barbara love this window in their Sacramento home.

Tony Matheson

March is when the coronavirus really hit. What was it like moving during that time?

It was difficult and terrifying in the beginning. We moved in ourselves without hiring movers. Then, after we moved in, it was quite an adjustment. Simple things like calling an electrician or completing other minor home projects were enormously difficult.

Did you make any renovations to your home?

We put $10,000 to $12,000 into the house so far. The major issue after moving in was electricity—it needed to be completely reconfigured. For example, the second bedroom, which became my office, only had two plugs. Between my monitors for work, computers, Peloton, cellphones, and other devices, I needed 12 plugs. We also wanted to put in a tankless water heater for more space, and install a security system.  

Tony working on the house
During the COVID-19 shutdown, Tony and Barbara painted their new home.

Tony Matheson

How did quarantine affect these repairs?

It was horrible. We couldn’t get anyone to come out to do any work for at least three months. For the first month, no one was booking. Then, when we could finally get through, the businesses were overwhelmed with requests.

Tony celebrating new home
Tony and Barbara celebrate finally closing on their dream home in Sacramento.

Tony Matheson

What was it like when you finally settled in?

It was exhilarating, exciting, and weird. Exhilarating because we got the house we wanted. Exciting because we were beginning a new phase in our lives. And weird because we moved in at the beginning of the pandemic. We wanted to have a housewarming party, but of course, we couldn’t.

What is your advice for aspiring home buyers?

Even if your finances are completely buttoned up, be prepared that buying a house may be a difficult and even painful process.

first time home buyer
Tony and his daughter on game night in their new home

Tony Matheson

Emotionally it does get hard. As much as you try not to get attached to a house during the negotiation process, you can’t help it. And there is a competitive drive that kicks in when you are in a bidding war with others. It’s draining.

Still, in the end, knowing that you’ve overcome challenges along the way just makes you more appreciative of the reward at the end. We have a place to call home amidst all this craziness. It’s all worth it.

first time home buyer
Their parrot Kiwi also enjoys the new home’s view.

Tony Matheson

The post Why 2 Finance Experts Still Struggled To Buy This House appeared first on Real Estate News & Insights | realtor.com®.

Source: realtor.com




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