Hud Homes

Five Tips for Buying a Foreclosure Property Below Market Value

By Jim Saccacio, RealtyTrac Chief Executive Officer

Search Foreclousers

For people willing to do a bit of homework, the foreclosure market offers some of the best opportunities available in real estate today. Experts point toward significant growth in available foreclosure properties, so there’s never been a better time to line up your resources and educate yourself about this previously hidden market. It’s not unusual to save from 10 to 30 percent of the market value on a foreclosure property, and certain properties offer savings of 50 percent or more! There really are bargains out there. You just have to know where to look.

Web-based services such as RealtyTrac give consumers access to foreclosure and pre-foreclosure information that was previously available only to professional real estate brokers and investors. Today, homebuyers can use these services to identify and research potential home purchases, as well as to find the tools and professional resources they need to help them close the deal. RealtyTrac, which provides all the foreclosure data for both MSN House and Home and Yahoo! Real Estate, has already compiled a list of over 550,000 foreclosure properties across the country.

• 1. Learn about the different types of properties and the foreclosure process.
  Not all foreclosures are the same! You need to educate yourself on the difference between the three basic types of properties, including notice-of-default (NOD), notice of trustee sale (NTS), and real-estate-owned REO, as well as the positive and negative aspects of buying at each stage of the foreclosure cycle.
  As a rule of thumb, the best savings can be made at the pre-foreclosure stage, where home owners can avoid a foreclosure and lenders can save the time and cost involved in going through the process. Another critical point in the process is immediately prior to the auction date, when all parties might be most open to a last-minute solution.
• 2. Secure financing early
  It’s important for a buyer to be pre-qualified before engaging in discussions with a seller. This ensures that the buyer is in a financial position to purchase the property, and is in the strongest possible position to negotiate.
• 3. Engage a real estate agent as a “buyer’s representative”
  There’s a distinct difference between a buyer’s and a seller’s representative. Buyer’s representatives have the home buyer’s interests at heart, and are charged with finding the right property and negotiating the best price for their clients. Picking the right real estate agent will make your life much easier. Ideally, select an agent who specializes in the foreclosures market and has specific experience in REO properties.
• 4. Do your homework
  Purchasing foreclosure properties is somewhat more risky than buying traditional real estate properties. But, with that risk comes reward in the form of much higher potential savings. With the right examination and due diligence, buyers can significantly reduce the risks. As with any purchase, timing is everything! But, it makes sense to give any property under consideration a thorough examination, including determining its condition and value, finding out the amount in default and the remaining loan balance, and running a legal investing report to make sure the property is free of any financial liabilities. Of course, it never hurts to foster a positive relationship with the seller!
• 5. Make a realistic offer
  If you want to be taken seriously as a buyer, you must be realistic when preparing an offer. Lenders aren’t likely to give properties away, particularly in a real estate market where prices continue to rise. Additionally, homeowners in financial distress may be difficult to deal with, particularly early in the foreclosure process. An educated buyer—one who knows how much is owed on the property and what its market value is—can usually come up with a realistic offer; one that offers significant savings, while meeting the requirements of the lender.

Congratulations! Buying a home is likely to be the single most important transaction in your life. And it can instill a tremendous sense of security and pride like no other investment can. Talk about an exciting experience!

• You get to make the decisions!! Go ahead and paint your bedroom red and your living room blue! Now you won’t have to worry about landlords telling you what you can and cannot do with the home.
• You get tax benefits!! By itemizing your deductions on your federal income tax return, you can deduct the mortgage interest and property taxes.
• You have a long-term investment!! Don’t let the news of the depressed market scare you off; this is a terrific time to buy a home.
• You have a sense of security. No more worries about the landlord raising the rent or telling you that the home is being sold. You are the owner, and you call the shots!

Rent vs. Buy

• How long will I live here? If you plan on living in the area for more than 3 years, it may be to your benefit to purchase a home. Every month you are renting, that money is going to someone else – the owner of the home. You don’t build equity in the home and when you move, you walk away empty-handed. There is no money to acquire from a sale to then put towards another home.
• Does it make better financial sense for me to rent or buy? There are many, many calculators on the Internet, including those you can find at Find-A-HUD-Home-Today that can crunch the numbers and tell you whether it makes financial sense for you to purchase a home right now. These calculators can factor all sorts of things for you, but only you can make the ultimate decision. You have to ensure that the numbers you are using are actual…and it may take you a month or two of tracking your budget and really paying attention to what you are paying in order to have the true dollar figures necessary to come up with an actual calculation that is close to reality.
• How much money do I need to have to buy a home? There is no set amount of money that you need to have in your savings account in order to buy a home. If you can save a good chunk of money, then you’re ahead of the game. But, there are so many wonderful programs out there, especially when you buy a HUD home that can assist you and keep your out-of-pocket costs to a minimum. In Chapter 3 you will read about the various special programs offered for HUD homes and in Chapter 6 you will learn all about the special mortgages that you can obtain.
• Is my credit good enough to buy a home? Perhaps you are currently renting while you are building up your credit. Again, there are some wonderful HUD programs out there, and a knowledgeable HUD approved broker can work with you and recommend a FHA approved loan officer who has extensive experience in such specialized programs. So, for those with less than stellar credit, these HUD programs can work wonders.

How Much Home Can I Afford?

To determine what price range you should look within, you need to look at several different things. Keep in mind that while a loan officer can possibly qualify you for a home in a certain price range, you may look at your monthly bills and realize that what you can afford to pay monthly may not exactly line up with that price range figure. For example:

There are also instances where a buyer may not qualify for as much home as perhaps his monthly cash flow can afford. This is typically due to a high debt to income ratio.

As you can see, there are two ways to look at what you can afford. It’s the loan amount that you may qualify for, and also the monthly payment that you can comfortably afford. Typically, when lenders look at your financial information, they will want to see that your debts total 36% or less of your gross annual income.

Don’t become disheartened if you feel that you are not in a spot to buy right now. Mortgage calculators are great tools, but they don’t take the place of an experienced professional. There are so many programs out there and so many options, that if you really want to move forward and look into what you can afford, you should take that step! In any case, it will get you on the road to homeownership, even if it’s not the right move at this very moment in time.

Determining Needs vs. Wants

Once you’ve got an idea of what you can afford, that sales price range may very well dictate some of the more “fun” aspects of buying a home. Sure, the price point will steer you here and there during your path to homeownership, but you still want to take the time to evaluate what things you want to look for in a home. And the more you know about your needs and your wants, the easier it will be to find that home!

But you do have to determine the difference between what you must have, and what you can live without. We’ve all heard the adage, “Champagne tastes on a beer budget.” And we don’t all have champagne tastes. But we do all have our own tastes…and that means that we all have our wants, our ideals, in a home.

I’ll let you in on a little secret…even if you had all the money at your disposal to build your dream home, you’d still find something wrong, something that you missed, something that wasn’t quite “right” when all was said and done and your custom home was built. The fact is there is no way we can possibly think ahead for every possible scenario. And our tastes change. Even in a short time frame. It’s okay to get something that you are “okay” with. Because you know what? You have the power to change most of it to exactly what you like in the long run anyway.

Location

One of the most important parts of your home search will be the location. Again, the price range you’re looking in will largely dictate the area you search for a home. If I live in Los Angeles and have been qualified by a lender to purchase a home for $400,000, I certainly will be steering clear of Beverly Hills.

It’s important to remain open-minded about location, however. There are areas that may be in the process of being renovated. Or they may be the “next big thing.” And while you want to be close to the office to cut down that commute, keep in mind that you will probably change jobs sooner than you would move anyhow.

When you think location, think about everything from your job, to your family, to your hobbies. Are you an avid jogger? You may want to be closer to a park or open spaces where you feel safe to run around. Like the city life? Perhaps you want to be close to all the “goings-on” about town and in an area where you can walk to restaurants and shops. Only you know you. So evaluate what would work in the long run.

Size

The size of a home is something that may also be limited by your price range. But you still need to think of necessities versus wants. Yes, you want two bathrooms…but could you manage with one? An extra room for an office or to use as a hobby room is nice, but not a must. Obviously, if you have a family of ten, then a 2 bedroom, one bath home would be an ultra-tight squeeze. But see how flexible you can be. If you really want (and think you need) a 3 bedroom, 2 bath home, can you make do with a 2 bedroom plus a den? If you limit yourself and your search to very specific parameters, you may be missing out on a jewel in the rough that can be polished to fit everything you need and more.

Amenities

Now for the really fun stuff – the “extras” or the other things about a home that you really would like…ranging from extra closet space to tile flooring, or an RV gate to a work bench in the garage.

Most amenities are indeed extras, or wants. You can live without them, but boy would it make life a bit nicer having them. Don’t discount them in your search for a home. Depending on your price range, you may need to make some concessions but that certainly doesn’t mean that you want to just give up and purchase a home just for the sake of homeownership. You should find some perks to owning that home and perks can definitely come in the form of the “little things.”

1. Make sure that you hire an inspector that has a good reputation. In other words, do not use a company that is not going to check every last detail. Remember, the home inspection is your last chance to find problems; big or small. You want to make sure that you are made aware of any issues that could cause a problem later on. This way you can negotiate to have them fixed, or at the very least complete the repairs on your own at a later date.

2. If possible, make sure that you are present during the home inspection. This will give you the chance to speak with the inspector face to face. He or she will be able to tell you what they see, and you will also have the ability to ask questions. While you do not have to be present during the inspection, it usually helps in more ways than one.

3. Follow the advice of your real estate agent. They will be able to tell you which home inspection companies are best, as well as what you should keep an eye out for. And of course, if there are any problems with the home, you should work with your agent to negotiate the repairs with the sellers. It is safe to say that you real estate agent has seen anything and everything as far as a home inspection is concerned.

Overall, these three tips will help you to succeed during the inspection process. If you are buying a home, you definitely want to pay to have it inspected. As long as you are comprehensive with the process, you should not run into any problems.