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Before you buy a foreclosure property, do your homework!

November 20, 2005 01:21 PM EST | Real Estate | Email to Friend

By Rick Sharga, Vice President of Marketing for RealtyTrac

There are two words that give pause to the most motivated foreclosure buyer: due diligence.

Those words mean researching all the risks involved in a property purchase, which in the past meant extensive legwork and expense. But that’s no longer the case, thanks to exponential advances in information technology and the establishment of Web-based property data aggregators like RealtyTrac.

Don’t be fooled – buying a foreclosure property doesn’t equate to easy money by any means. A savvy player in this market is willing to do a bit of homework. But the tools and resources needed to do that homework are much more accessible now than ever before.

“While buying a foreclosure property is certainly not without risk, the right examination and due diligence on the part of buyers can significantly improve their ability to make a strong investment,” explains James J. Saccacio, chief executive officer at RealtyTrac, the leading online foreclosure marketplace.

Web-based services like RealtyTrac can help investors and homebuyers tap into the previously hidden foreclosure market by providing access to property data formerly 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.

It makes sense to give any foreclosure property under consideration a thorough examination – possibly even more thorough than for a traditional real estate property. There are three stages of foreclosure that require different research strategies: pre-foreclosure, auction and bank owned.

Before buying a pre-foreclosure property directly from the owner, run a preliminary title check for all debts secured by the property. You can research the title online using RealtyTrac’s Legal and Vesting Report or Transaction History Report. Subtract the total amount owed from the estimated market value to determine the potential bargain. After making contact with the owner, arrange a walk-through of the property to evaluate its condition. Factor estimated repair costs into your purchase offer. Before you close the deal, hire a professional home inspector to inspect the property and enlist a title company to run a final title check.

In most states, you don’t have a chance to inspect a property before buying at a public auction, which makes this type of purchase more risky. But if you’ve researched the title and determined the amount owed is far less than the market value, you’ll have some margin to cover unexpected repair costs. Before you go to the auction, set a maximum bid based on your research and stick to that bid at the auction.

Although you’ll be able to inspect the property if it’s bank owned, the bank typically knows little about the property and will sell it in “as is” condition. This means the bank will disclose all the needed repairs it knows about, but is not held responsible after the sale for any repairs it did not know about. Factor the known repairs into your purchase offer and have a professional inspection conducted before closing the deal. You should also have a title company run a final title check before closing, although most banks will make sure the title is clear before selling.

Here are eight steps for doing a professional-level property examination for all stages of foreclosure:

Identify desirable neighborhoods – Find specific neighborhoods where you would like to live or own a home. This will limit the search to a manageable size for you and your agent, and give you a sense of relative property values.

Cast a wide net – There are a number of Web-based services like RealtyTrac that can put hundreds of thousands of foreclosure properties at your fingertips. But remember, the best savings are often found in pre-foreclosure properties; therefore, it’s important to check the percentage of pre-foreclosure (vs. REO) properties in any database before subscribing.

Determine the property value – Look at the original purchase price and recent comparable property sales to determine the current value of the property. You can obtain information on recent sales in the area via Multiple Listing Service (MLS) comps from your realtor or by ordering a report such as RealtyTrac’s Comparable Sales Report. Ideally, you should look at comparables sales in the area over the past six months. Then you can drive by each property on the list of comparables and note its condition, size, appeal and location. You should also look for properties that are currently listed for sale in the area and research the same information for them. From this information, you can get a good idea of what the property you are interested in is worth.

Find out the amount in default and the remaining loan balance – In order to determine a reasonable offer price, you’ll need to know – at a minimum – how much money it will take just to satisfy the debt to the lender. This information is available on the foreclosure documents filed by the foreclosing lender and from online foreclosure-tracking websites like RealtyTrac.

Check for other liens – Before purchasing any foreclosure property, make sure it is free and clear of any bankruptcies, tax liens or other financial liabilities. A title search will examine records used to determine the legal ownership of the property and all liens and encumbrances on it. A title company or attorney can run a title search for you. You can also research the title online using RealtyTrac’s Legal and Vesting Report or Transaction History Report.

Assess the condition of the property – In addition to visiting the property yourself, hire a professional inspector to inspect the property to make sure that the property is in acceptable condition, or to determine how much of a rehab budget you’ll need to build into your deal. If you buy during pre-foreclosure or directly from the bank (REO), it’s usually possible to conduct a thorough inspection. But if you buy at the public auction, it may not be possible to view or inspect the property beforehand.

Build a positive relationship with the seller – Before purchasing a property, try to make sure that you’re entering into a win-win situation with the seller, so that they’ll be more willing to do what they can to make the process easy and leave the property in good condition for you.

Leverage your timing – Knowing when a property is going to be auctioned gives you an extra bargaining chip when negotiating with a seller or a lender. You can sometimes contact the seller just before the auction to see if a last-minute sale is possible. At the very least, knowing the intended date can help you organize time to research the property as much as possible, review comparable sales, calculate values and potential profits and ultimately determine a bid price so that you’re well prepared to compete with other investors on auction day.

It’s sometimes said that in real estate, selling is about business while buying is controlled by emotion. While this may generally be true, it’s important to keep your head about you and think through the process so that you can make the most informed decision possible. Remember, a little preparation before the sale can help you reap huge benefits. So, it’s worth your time and energy to do a little homework!

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