I was looking through some notebooks on things I’ve learned throughout my home buying experiences and what kept catching my eye today was the notes I kept on buying foreclosed homes. I’ve purchased a few so far and have had great success in doing so. Buying a foreclosed home is a little different then buying a home from a seller in that you are dealing with a bank instead of a person. There are several tactics and practices banks use to sell homes and what they do when they receive an offer. You can get a really GREAT deal on a foreclosed home if you are smart about it but you need to be fully aware of a what you are getting into. You could quickly overlook some things that can turn your good deal into a nightmare if you are not careful. I’ve listed a few tips I have learned along the way. These are not in any particular order… just good advice 🙂 Most of these can be applied to buying a home whether it be a foreclosed home or not.
- Sometimes banks move at a MUCH slower pace than dealing with a person who is selling their home. Be prepared to be patient, even getting a response to an offer can take weeks. Not all banks are slow… but most I have dealt with are.
- GET A HOME INSPECTION! Some banks will try to sway this from happening (mainly if they receive more than one offer) but it is in your best interest to get this. Even if you have to waive your right to back out of the sale if you find something you don’t like. Buying a home without an inspection is like marrying a man without a first date. Point blank… you need to know what you are getting into.
- Check to see how many houses are for sale in the area and how many sold that year. You need to be sure that the home is a good deal and there is no way to do this unless you know your market. If the home needs to be fixed in any way, you need to add up the costs of doing so to the amount you are willing to pay for the home. Every neighborhood and home has a cap to the amount a person would pay for your home. Know this number and don’t go over it. Even if you REALLY love the home and are planning on staying forever and there are unicorns and rainbows out in the backyard. You shouldn’t go over your cap for any reason because you never know what will happen in the future and if you might have to sell. No one wants to be stuck with a home that is underwater (you owe more than the home is worth) or out of money and still needing to fix things to make it livable.
- Before making an offer on the home, find out if there are any outstanding work orders, building citations, or liens. If you are financing your bank will require a title search and clear title. If the home has a lien against it your bank will not give you the money without a clear title. Knowing about these problems before buying can help you weight the option to buy with the seller and you can ask that they clear the title before you sign a contract to purchase. You can also ask for $$ off the price of the home because you are going to be dealing with problems down the line. We recommend getting title insurance even if you are not financing the home. Title insurance is protection against loss arising from problems connected to the title to your property. Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands went through many more. There may be unpaid real estate taxes or other liens on the home. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.
- If possible get copies of any work that has been done to the home recently. Every city requires permits for most renovations and they are available for you to look at and print out at your city’s permit office. You can do this before you make an offer and before you do a walk through. If you find work that has been done to the home and you don’t find a permit, this means that renovations have been done without permits and this can be very serious because NO ONE inspected it. Do you really want to buy a home that had a whole bathroom installed without a permit? Picture your toilet or sink leaking all over the brand new birch hardwood floors and, of course, this only happens while you are on vacation! You could also have a house fire because someone did not close a junction box correctly. I have encountered this in many homes, i.e… Junction boxes left open up in the attic; Kitchen walls closed up over open boxes. All they needed was a little moisture and SPARK! There goes a house fire in your newly renovated home. Inspectors are your best friends. They make sure the work was done right and up to code. Even the most skilled workman or plumber can make a mistake or take a shortcut and an inspector is there to prevent this from happening. Knowing about these issues before putting in an offer can also help you get a deal on the home if you are willing to fix them.
- Sometimes when a home is a good deal you could be competing with other buyers for the home. This could lead to a multiple offer situation. I’ve dealt with this a couple homes so far. I made an offer, the bank responded by throwing all offers back and telling all competitors that we were now in a multiple offer situation. My first impulse was to offer my max and go pray but I quickly went into research mode and found out that this is not just about offering the most money. Banks and sellers want a good buyer. A good buyer is someone with NO hiccups in financing and it is essential to get pre-approved and give a copy of this to the bank/seller. A buyer is also someone who can close quickly, is willing to sweeten an offer by dropping contingencies and who can put more down on the home. An added benefit is that by putting down 20% on your home will allow you to go without paying PMI (Principal Mortgage Insurance). Another little known fact is that you can also put in an escalation clause with your offer. The main challenge when competing for a home is that you (usually) are not privy to what the other offers are. An escalation clause allows you to bid competitively with the other offers without paying more than you need to. You can put in an offer for an amount you are willing to offer and add an escalation clause stating that if there are offers over yours that you offer to pay $1000.00 (or whatever amount you deem necessary) over the amount of the highest bidder not to exceed a certain amount. Sounds like a little like eBay, huh? Well, it’s totally legal and because most people don’t know about it it could make you the winner of the bidding war.
- This is true for any home sale… Make sure you get the HUD 1 statement as earliest as possible before closing. Some closings agents/attorneys will try to only let you see it the day you sign the paperwork. This is simply because someone forgot to send it to your realtor or the realtor forgot to send it to you. I’ve even seen some shady practices of banks forstalling this because of hidden fees on the HUD 1. You need to go over this paper with a fine tooth comb. Meaning: look at every line for any inaccuracies. Most of the homes I have purchased had problems on the HUD 1 statement, delaying the sale of the home to another week, and another week until everyone made the corrections because NOTHING happens quickly when dealing with a bank. Getting the HUD 1 beforehand will allow you to review it line by line to make sure everything is listed correctly. Sometimes even saving you money in overages you might pay because you just want to be handed the keys to the home and be done with the closing because you already have movers hired and dates set.
- Remember that foreclosed homes are homes that someone was eventually kicked out of. This can mean that the person getting kicked out of the home is somewhat disgruntled. I was VERY lucky and didn’t have a problem with the homes I did end up purchasing. But… I did do walk thrus in homes when I was searching that had obvious disgruntled previous owners. One home was completely gutted, no sink, no cabinets, no fixtures, they even ripped the carpet out. It also had a funky smell in the home that I could only ascertain was caused by a dead animal somewhere hidden in the home. Of course you are going to see these obvious things when first looking at the home, just be aware of EVERYTHING and don’t just scratch the surface when you go to view the home. One home had an AC unit disappear from the time I first looked at it and viewing it a second time a day later. Don’t worry about taking your time. A good realtor will encourage you to do so. Make sure the home has even the most obvious things. Look under the sink for missing pipes (people will sometimes rip these out and sell the copper). Look for an AC and heating unit (these are VERY costly to replace). MAKE SURE YOU TAKE PICTURES! And make sure you do a walk-through of the property before signing the final paperwork because there are a whole slew of thieves out there who prey upon homes that are foreclosures and you don’t want to get the keys only to step into your new home and find out it is missing an AC unit… or more.
Considering the above items and maybe adding a few more of your own can help you steer clear of problems. Even great designers and decorators know the importance of this. I read a quote from famous designer named Dorothy Draper, “Too often when we’re buying or building a house, we do not consider each room. We are carried away by one charming feature and are blind to the details that will give us trouble later on”. I know it seems like a lot to do but it’s not because I have done it each time I have purchased a home with little effort. You can get a GREAT deal on the home you want for much less which will save you a lot of time in the long run. Good luck, I hope this helps you on your search! Be sure to check out my other blog posts for more helpful tips. Happy Hunting!