Foreclosure and short-sell deals can get you into a home on the cheap. Are you prepared for a potentially convoluted transaction?
As the inventory of foreclosed homes on the market piles up, you might be tempted to jump in and get yourself a great deal on some real estate. That's a realistic proposition-as long as you know how to avoid getting burned on a foreclosure purchase.
In the best-case scenario, buying a foreclosure or short-sell home is a win/win situation: you get the property for a nice price, and the former owner and lender can cut their losses and move on. Unfortunately, these transactions don't always turn out that way. If you aren't adequately prepared for your distressed property purchase, you may end up wishing you'd never gotten involved.
Get prequalified for purchase mortgage
Before you fall in love with the foreclosure on the corner, talk to a few lenders about financing. Obtaining a purchase mortgage is more difficult than it used to be, so start this process early. Get prequalified, and evaluate the affordability of your purchase mortgage payments, as well as taxes and insurance. Quiz prospective lenders on how to streamline your purchase mortgage approval.
Skip the auction
Buying at an auction limits your ability to inspect the home, and generally requires you to pay in cash. Inexperienced homebuyers should generally avoid the foreclosure auction. Limit yourself to buying a distressed home before the auction in a short-sell transaction, or after the auction when it's a bank-owned property.
Inspect with an expert
Foreclosures are often beat up. The former homeowner may have sabotaged the property out of frustration, or the home may have been vandalized after it had been vacated. To minimize the chances of getting caught off guard with huge repair bills, bring a contractor with you to inspect the home. Get an estimate of potential repair costs before you sign a purchase contract.
Take a walk
Don't make the mistake of focusing so much on the home that you forget to inspect the neighborhood. The housing crisis has changed the character of some areas, particularly those that have a high percentage of foreclosed properties. Problems with vandalism, homelessness, and gangs are things that you want to know about before you buy. Take a few walks around prospective neighborhoods at various times of the day. Assess the quality of surrounding homes and talk to the residents.
You won't have a problem finding foreclosure deals, but you might have a problem finding the right one. In this real estate market, it pays to be patient. It's not so easy, after all, to undo a rash purchase decision. You'd have to put the home back on the market and try to sell it off quickly. That scenario virtually guarantees that you'll get burned financially, because you won't be able to recoup closing costs and sales commissions in your asking price.