Homebuyers looking for a bargain by purchasing a foreclosure should educate themselves on the process ahead of time.
In this market, many homebuyers looking for a bargain consider purchasing a foreclosure. Their thinking is that they’ll accept a house that needs a bit of work in exchange for a big discount.
While there are some deals to be had on foreclosure houses, it pays to educate yourself on the purchase process ahead of time. “A lot of people are in love with the idea of a foreclosure because it sounds like a great deal—and it can be,” says Greater Minneapolis/St. Paul realtor Tom Sommers. “But at the same time you have to be willing to do some work on the home, even if it is as little as carpet and painting.”
Sommers shared a few points on the foreclosure purchasing process:
1) Figure out if a foreclosure home is for you.
While a foreclosure home sounds like a good idea, it’s not right for everyone. Who is it not right for? “Probably someone who is a first-time homebuyer that doesn’t want to do any amount of work at all and just wants to physically move into a property,” says Sommers.
To make sure that the homeowner is prepared for a foreclosure purchase, Sommers often takes clients out to see foreclosure properties as well as regular residential properties in the same price range. “I usually encourage homebuyers to look at anything in their price range. If the foreclosures seem to be too much for them, they usually figure that out on their own.”
2) Find an agent who specializes in foreclosures.
The do-it-yourself mindset of someone who wants to purchase a foreclosure home might lead them to think that they can take that same approach to finding and closing the deal on a foreclosure home. A foreclosure home is not a normal purchase and having an experienced person walk you through the process can be extremely helpful.
“I’m here to safeguard you and minimize your risk by making sure that you understand what you’re getting into,” says Sommers. “That includes making sure that you have the right title people, a good closing team, and help putting everything together so that you have the best experience.”
One issue that people without an agent face is losing a house because all of the paperwork isn’t in order. “The advantage of working with a professional like myself is that I know the process inside and out,” explains Sommers. “The key to getting a foreclosure is having your offer written correctly the first time.”
It is also key to have someone who can follow through for you. “Having someone on your side who is representing you will ensure that after the offer is presented and the bank gives you a verbal acceptance, there will be a follow up with the listing agent to make sure that you get a signed purchase agreement.”
The purchasing agreement is not something for amateurs to take on. “There are so many contingencies in a purchase agreement,” says Sommers. “Not only is it my role to make sure that you are aware of and understand the contingencies in a purchase agreement, it’s also my role to make sure that these contingencies are met properly so that you don’t lose your hard earned money or that the deal doesn’t fall apart over something that could have been avoided.”
3) Have all of your financing worked out ahead of time
As with any purchase of residential real estate, you should have your financing worked out before you start looking for a house. It’s important to figure out what you can pay every month before you start the house hunting process so that you don’t fall in love with a house (foreclosure or not) that you can’t afford. “You don’t want to buy something that is out of your comfort zone for what you want to spend monthly. It’s not a good deal if you are house poor,” says Sommers.
You should also get prequalified so that you can quickly jump on a bargain foreclosure if it does come your way. “Make sure that you get a really good loan officer and get a prequalification so that when you do find the home that you want to buy,” says Sommers, “you have all of your information right in front of you and you are able to put together an offer right away.”
4) Educate yourself on 203(K) financing.
If you decide to purchase a foreclosure that a bank does not consider inhabitable because it lacks toilets or carpeting or needs other work, you will likely need to get a 203(K) mortgage that allocates funds for the repairs.
“Right now, that seems to be the best option and it’s a wonderful program,” says Sommers. If you are going to use the 203(K) program, be sure to have a knowledgeable loan officer who can to explain everything about the loan. “Also, make sure that you get several different bids from several different contractors,” says Sommers , “because once you’ve chosen the contractor and you’ve had the bid submitted and you get the money for the 203(K), you are locked in.”
5) Consider traditional residential real estate.
In this market, you might as well take a serious look at traditional real estate as well. “The sellers of traditional real estate have realized where we are in the market, so they have really adjusted their prices a lot,” says Sommers. “You can get a nice, single family home at a reasonable price and still end up getting a deal. It’s not a foreclosure, and you won’t have any issues because there’s no work to do and you can literally just move right in.”
After all of this, you may be wondering if foreclosure properties are still a deal. “I do still believe that there is an advantage on the foreclosures,” says Sommers. “If you are still looking strictly from a pricing standpoint, you are going to get typically a better deal. It’s like anything else, though, you have to have an agent going through with you and taking care of everything ahead of time to let you know if it really is a good deal in the long run.”
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