Buying Foreclosed Properties

[fireant911]

My wife and I, after utilizing a very disciplined approach, paid off our current home in 3 years and 4 months - I have loved the aspect of not being in debt since then. During the work/school week we live in two different cities - me in Jacksonville and my wife in Birmingham. This arrangement is due to her being in medical school at UAB. We have been renting a 'cottage' in B'ham for the past two years but my wife will be transferring to Huntsville in April for her clinical rotations. Rather than renting a place we are considering purchasing another home - I will continue to reside in our Jacksonville home. Today, we spent 8-1/2 hours driving around that area and found some attractive properties. The one's that captivated us the most were two foreclosed homes. My question is does anyone have any experience buying foreclosed properties? What questions should we be asking (that one would not be asking during a normal purchase)? What sort of access to capital is required for such as transaction? Any help from experienced parties would be extremely beneficial!

[red-beard]

Subscribing

[fintstone]

I bought a repo from HUD back in the late '80s. I looked at a lot of them and most really were not a great deal because of condition. None had electricty or water on and some had been vandalized or stripped by the previous owner....so they were pretty much "as is." The one I bought was well below market and in good shape. I fixed it up a bit and it came out nice. I moved 18 months later and sold at a profit.

[Eric Coffey]

REO properties can be good investments, provided you go in with open eyes. Typically, banks prefer cash deals & quick closes, but most do consider conventional and even FHA/VA financing these days (depending on the condition and/or level of rehab they have performed). All banks are different as well. Some will consider one offer at a time, and some will wait until they have a few in hand, stipulating a deadline to submit your "highest & best" offer by. Just know that the really good deals will go fast and usually by investors/pros "ready to pounce" with cash. If you have cash or access to hard money, your options and potential for better deals are greater.

This is true because, 1.) Cash is (still) king. Banks will give more consideration to your cash offer (and quicker close), even if it's less then an offer from a buyer requiring financing. 2.) You are not bound by financing/appraisal/occupancy cert. contingencies and requirements. This means that you can purchase an REO that needs a little work (that's not eligible for financing) much cheaper than when the bank dumps rehab $$ into it and increases the price.

The corollary to that is that most banks will not make repairs if/when requested. Sometimes they will consider seller credit in lieu of repairs, but typically only for "warranted" items (like plumbing, HVAC, etc.). Basically you are buying an REO "as-is" (and will be signing contract/lender addendums stating such). Another thing to keep in mind on REO purchases is that you will not receive any prior info or seller's disclosures on the property, so due diligence is key.

[turbo6bar]

I've noticed the cheaper properties are seeing sporadic activity. Sometimes, they'll sit and investors will get a really good discount. Other times, homeowners will bid at first chance and pay well over asking. I speculate the government tax credit is creating some artificial demand. If you go above a price threshold, you'll find less interest from the normal buyer, and you can grab some great deals after discounting the lender's asking price.

Have your financing in place beforehand. Don't underestimate the costs/labor for repairs. A simple rule I favor: For every dollar invested in repairs/materials, I want at least $2 of equity (eg. $5k in repairs = $10k in extra equity). If you're providing sweat equity, you want more equity output. $500 in materials + sweat equity = $2500 in new equity, for example.

Don't forget the pride of ownership and emotional well-being. If you're drawn to one house emotionally, be fine with paying a little more, but don't go crazy. Buying a foreclosure is ALL about saving money. You can bank a lot of emotional well-being by buying a great property at a GREAT price.

If you're numbers driven, check local pricing of rental properties. How does that compare to the cost of owning?

As far as condition, you're on your own (properties sold as-is). However, there really aren't a lot of deal killers. I rate foundation as one deal killer. Roof: can be repaired. Paint, drywall, carpet, cabinets, flooring: these cosmetic details are straightforward. HVAC can be hit or miss.

If you get some details, post here. Maybe we can digest and give feedback. good luck, jurgen

[Hetmann]

Does your wife want to live in a fixer-upper while she is doing clinical rotations? Can she swing a hammer?

[fireant911]

Originally Posted by Hetmann

Does your wife want to live in a fixer-upper while she is doing clinical rotations? Can she swing a hammer?

Hetmann,
That hammer will definitely be in my hand... It has already been explained to me that I will be up every weekend (providing we buy a second home) to do the necessary work!

We have contacted a realtor and will be viewing the internals of properties in question this next weekend. I realize that some work will be taking place but given the location and the condition, this may be a wise thing to do.

[Dantilla]

Get a title search first.

Maybe not as big of an issure as with home auctions, but many people got a "great deal" only to find out there are liens against the property.

[fireant911]

The deal is done!!!
We submitted an offer on 02 February and closed on the property this evening. During this journey we looked at several properties. The first property we submitted a bid on we did not get (great location however it needed about $26K of work - supposedly we were outbid though it just recently re-appeared on the market this week...). Our second 'sight-seeing' visit involved looking at 12 different potential candidates. At the conclusion of this visitation we arrived at four real prospects. Of those four prospects, one quickly rose to the top using a derivation of the Quality Function Deployment (QFD) tool I developed. Interestingly, my most favorite choice fell to the bottom of the list when analyzed with the QFD concept. The house we closed on today is wonderful although the previous tenants were apparently disgruntled when leaving as the jacuzzi was removed, the HVAC wires were all cut as were the refrigerant lines (they intended to take this with them), and the outside water faucets were kicked off in spite. We will be in 'high cotton' after investing about $5K.

The property is just outside of Huntsville in a very rural setting (cow pastures in front of and behind the house). We have already met the neighbors and all is good. The HUD process is a bit frustrating at times yet, in the end, it worked out extremely well for us. Key take-aways - get a thorough inspection!!! Our inspector was extremely anal and spent five hours on site.

[Dantilla]

Congrats!!

[Porsche-O-Phile]

Don't fall for the "best and final offer" bullcrap. This is simply a fear-and-frenzy sales tactic designed to scare you into interpreting it as "if you don't come up on price, you're going to lose".

My standard response to this line is "you already have it - take it or leave it". And it worked well on the place we nearly bought 2 years ago - the bank accepted our offer (REO).

Good luck. I'm subscribing too - I really am hoping that a lot of the stuff surrounding foreclosures gets demystified here. Given some of the people that routinely buy them, it can't be THAT difficult. Yes, I'm sure there are pitfalls and "lessons learned" stories that we can all learn from, but once that's done, I'm willing to bet there really isn't anything magical about this process other than being in the right place at the right time and trying to find stuff that's off the beaten path where you won't have to compete against 50 other vultures... er... prospective buyers.

[onewhippedpuppy]

Congrats! Sounds like you found a good deal. Now get to work! Wives don't like to wait (coming from a guy who is remodeling his entire house).