Hungry for a piece of the foreclosure pie? Christopher Burkhart of Calaveras County, Calif., found a deal for less than half of its boom price. But before you search for your slice, here’s critical advice from some market insiders.
1. Not Everything’s “Cheap”
Not every house in foreclosure is a steal, let alone a good deal, experts say. “I’ve been surprised by that,” says Alexis McGee, president of Foreclosures.com. “A lot of times foreclosures are priced properly.” That is to say they’re priced similar to other homes on the market that may not necessarily be in foreclosure. Why’s that? Well, sometimes real estate agents want to price it higher because they’re trying to win the bank’s business, explains McGee. “If they sell it [at a good price], they’ll get more properties.” Instead, do your own homework by seeing what similar homes on the market are asking for, as well as the closing prices on homes that sold in foreclosure in the past 90 days. In general, foreclosure properties that have slipped 40% to 50% off their housing bubble peak price are worth investigating. Burkhardt adds that potential homeowners should also calculate how much it may cost to recondition the home, in case it’s been beaten up by previous homeowners. “I saw homes that had no toilets!” he says.
2. You Need Good Credit
Don’t assume that any person with any old credit rating can scoop up a foreclosed property. You may think homeowners and banks are desperate to sell, right? Well, they are. But credit ratings still matter. “Your credit score is a major thing,” says Burkhardt, who made sure to pay off $18,000 worth of credit card debt before beginning his house hunt. His credit score has since shot up to roughly 700, a great level to ask for the best interest rate on a mortgage.
3. Shrug Off Auctions
Auctions can be far too risky, experts say. When you purchase a home through a foreclosure auction there's usually no escrow, no title insurance and no inspections, and most transactions must be made in cash. “An auction is best for a person who is reluctant to deal with people," says McGee. "[Or] people who don’t want to negotiate or deal with contracts.”
4. Consider Mailing It In
Some foreclosure investors mail letters to pre-foreclosure home owners found at PreForeclosure.com, Realtor.com or www.RealtyTrac.com. "I let them know that I want to purchase their property and can offer a quick closing," says Michelle Mangione, a veteran foreclosure investor in California. That's how she bought a 4,300-square-foot home in Fallbrook four and a half years ago. She paid $670,000 for it and put it back on the market in 2008 for $1.95 million—a potential return of more than 140% (after the cost of fixing it up). Opportunities like that are rare, though, Mangione admits. For every 100 letters she sends, maybe one or two property owners respond.
5. Go Shorty
A more popular and less risky option is a short sale, in which the bank lets the distressed homeowner sell his or her house for an amount less than the mortgage. The bank then eats the loss, mainly to avoid the often heavier expenses related to foreclosures, such as legal fees, carrying costs and insurance requirements.
The bad news is that investors need to negotiate with both the homeowner and the bank. On the flip side, investors can finance short sales in traditional ways, like with a 30-year fixed mortgage, says Rick Sharga of www.RealtyTrac.com. Investors can find specialized short-sale real estate agents at their local real estate brokerage
6. Bank It
With some 50% of properties in a foreclosure auction getting sent back to the bank, there is a booming real estate owned market, or REO, where a bank owns the property, says Sharga. "Banks are getting buried with inventories of properties they've been compelled to take back." Typically, banks hire third-party brokers to assess the market and sell the homes. Many buyers contact REO brokers through bank or brokerage websites like bankofamerica.reo.com and reoexperts.net.
7. Be Persistent
“Know that foreclosures are a business of tenacity,” says McGee. It may mean approaching the same house several times before getting a deal. “A lot of times you make offers and don’t get the house the first time. You have to put a lot of effort towards this and not give up.”
Catch more of Farnoosh’s advice on Real Simple. Real Life. on TLC, Friday nights at 8.