So You Want To Purchase a Foreclosure?

There is no doubt about the fact that most areas of the country are experiencing a buyers’ market with regard to real estate. One could say that we are experiencing one of the greatest “sales” in history in which real estate is marked down! It is no wonder that many are expressing interest in participating in this sale by scooping up bargains. Of course, many of these bargains involve owners who are close to foreclosure or the home has already been foreclosed upon.

If you are interested in taking the plunge, there are some basic rules you must understand. Following these rules can help make your venture into the world of “marked-down” or distressed real estate a success instead of a frustrating process.

The first rule is don’t wait. Many are waiting for the market to bottom before jumping into the pool. There are two problems with this strategy. First, you will never know ahead of time what represents the bottom. Second, when the bottom hits, so many will jump into the water at once you will never be able to find the bottom of the pool because you will be too late. A better strategy is to understand that you are purchasing distressed real estate so that you can purchase it below market value. Here is an example–

A home is valued at $200,000 today.
You purchase it for $170,000 today.
The home drops in value by 5.0%.
At the “bottom,” it will be worth $190,000.

In other words, you will have a home which is $20,000 under value at the bottom. But if you wait until the bottom–the “sale” may be over.

Second, hire a real estate agent. Many think they can obtain even better bargains by going directly to the seller. However, you very well may pay more because you will lose the advantages of having the right agent on your side–

Knowing quickly what is a bargain and what is not;
Negotiating skills, especially with institutions;
Relationships with banks and other companies that may represent distressed real estate;
Access to a closing company and/or attorney who can handle legal questions that might arise.

Of course, you want to make sure you hire the right agent. Not every agent is an expert in purchasing distressed real estate–including relationships and negotiations. Do your homework.

You also need to make sure you hire a mortgage loan officer up-front. The loan officer can enlist the help of an appraiser that can give you feedback on home values. They also will make sure you have a pre-approval in place so that you can act more quickly. This may save you thousands on your purchase and make the difference in getting your contract accepted if there is more than one offer.

Being able to react quickly is absolutely the key for distressed real estate that is not yet in foreclosure. The loan officer and mortgage company you select have to be able to put you in position to submit an offer, get it accepted and close in a matter of days instead of weeks.

In addition, to act quickly, you must also know your goals for the purchase. If this is going to be your new residence and you already own a home, are you selling your present home or renting it? If you don’t qualify for both payments this will likely keep you from acting quickly. Even the value of the property in your eyes may change depending upon your goals. For example, if it is a fixer-upper and you have the time and money to undertake a renovation, the value of a distressed home could be even greater in the long-run. Many foreclosed homes are not in the best of condition. In addition, if the property is located in an area in which you would like to retire in the long-run, this location may include additional value for you.

Finally, you also must be patient to participate in the sale. This may sound like a contradiction to the advice we just gave you to “act quickly,” but it is not. When someone is trying to avoid foreclosure with a short sale, they may need approval of a bank and banks do not usually act quickly. If the bank owns the property, it is a certainty that you will deal with a slower process that can be frustrating. Sounds like a lot of work? Yes, but the result of saving tens of thousand of dollars is worth the effort, don’t you think?