Buying Foreclosed Homes: Be Careful

(CBS)  If you're looking for a great deal on a house, one option might be to purchase a home that's in foreclosure.

But Early Show financial contributor Vera Gibbons says the process isn't for everyone: It's complicated and fraught with potential stumbling blocks.

There's certainly no shortage of properties in or approaching foreclosure to pick from.

Some three million foreclosures are expected this year alone, according to the Web site RealtyTrac.com , three-to-four times the usual number.

Prices usually range from 20 to 80 percent below market value, depending on where the house is located.

But the process involves much more risk than buying a home the traditional way, Gibbons says.

So, where do where to start?

First, you have to find properties, and the Internet makes that easy, with sites such as Foreclosure.com and Foreclosures.com (two different sites), as well as RealtyTrac posting a vast array of listings to pick from.

The best bargains are in areas with the largest concentration of distressed properties, where there's a glut of homes banks want to unload.

But doesn't mean you should simply go for least expensive ones.

You must do your homework, taking into consideration the neighborhood, employment picture, school district, etc.: If you buy in an area that's losing jobs, has a high crime rate, etc., it's going take lot longer for home values to recover.

You could check out pre-foreclosure sales, in which you buy from owner before the house is formally foreclosed on. A "pro" of that is that you're dealing directly with the homeowner, who will likely be a very motivated seller at that point. You can inspect house, do a title search, etc. The homeowner would be able to sign the deed over to you; you'd assume the mortgage, and make any back payments due the lender. A "con" is that you'd be dealing with a seller who may be emotionally and financially distressed. There's also a short window in which to buy: Depending on the state, owners may only have a month before the bank puts the property up for auction.

The next stage in the foreclosure process is the auction. The obvious "pro": the prices. The "cons" include this being the riskiest way to buy, particularly if you're new at it. Investors like this method; they tend to renovate houses they buy at auction, then turn them around or rent them. But you're buying a house sight-unseen, with no inspection. It could be a total mess and in need major repairs. It might be a total lemon! Also, there may be unpaid taxes and liens that you, the new owner, would be responsible for. And you can only use cash or a cashier's check to pay.

If the house doesn't sell at auction, the bank that originally issued the loan takes ownership of the property and puts it up for sale through a real estate broker. Fifty out of every 100 properties now going back to the banks; this year, more than a million will be bank-owned. "Pros": There are lots of unsold homes to unload, so prices are likely to be good. Also, this is the safest and easiest way to buy foreclosed property, and you can get it with a traditional mortgage. You'll also have a chance to check and inspect the house before you buy it. A "con" is that you may not get as good a deal as you would from the auction block. Still, at least you know what you're getting, and can get it inspected.

[realtybargain]

Great article. www.realtybargain.net offers foreclosed properties for up to 90% below market value!

[dave12mccoy]

I found this short sale info that gives tips on short sale buying:

Pre-Workout Agreements
Most lenders require a pre-workout agreement prior to starting workout negotiations. Pre-workout agreements can take a variety of forms that range from a brief letter to a detailed contract that lays the foundation for future negotiations between the defaulting borrower and the lender. A well-written agreement establishes the history of the loan and the procedure for negotiating the short sale. It protects the borrower by preventing the lender from pursuing foreclosure on the property during the workout and allows the lender to avoid potential lender liability claims and defenses against their right to foreclose.

Tips for the Short Sale Buyer

* Do your homework before making an offer. Check public records. Find out who is on the title, how much is owed to the lender (to figure out how much to offer for the property) and if a foreclosure notice has already been filed (a short sale can only happen at the pre-foreclosure stage).
* Make sure you know how many loans are on the property. Avoid properties with more than one loan.
* Search for properties where the price is too low for the neighborhood, the property may already be in the short sale process.
* Make sure both the lender and the seller agree to your purchase offer. Both parties must agree in order for the short sale to go through. Have your agent submit the required documentation for approval.
* Get the appropriate contact for the lender and give them a deadline to respond to make sure your paperwork is processed in a timely manner.
* Once you find the home you desire, partner with an agent with short sale expertise.
* Ask your agent to waive the difference in commission between the buyer's broker agreement and the lender negotiated commission.
* Make sure the lender allows you to conduct the necessary home inspections before you purchase the property.

Source: (<a href="http://www.realtystore.com/realty-guide/foreclosure-tutorial/short-sales">Short Sale Tutorial</a>)

[paofpa]

A better place to start: look in neighborhood. Best guess: (mean salary + 0.5*lesser salary if a partner exists) = available salary. (2*available salary + 20% down) That should be the mean price of the house in the neighborhood. Remember: an extra bathroom and family room will mean: more taxes, utilities, furnishings, maintenance, depreciation, mortgage fees, real state fees, etc. Also, if you stay in your house for seven-ten years; costs like this will exceed your mortgage. If you?re investing, you should be looking at the expected change in the personality of the neighborhood not the past housing prices. Then start with your homework.

[joynwaterford]

I catch this show in the morning before work and I was very upset that you had an expert on the show and were discussing short sales and no one seemed to have a clue what these are. For you expert to say that pre forclosure the buyer might assume the 2nd morthgage etc. hence a short sale that is bull. A short sale is when the amount on the property owed is more than the property is worth. For the seller to sell it the whole thing must be approved by the lender or if there are more than one lenders. The owner may have the balance of t he loan forgiven but not always. The seller can not just enter into a contract and go to settlement.

[sjc_1]

"It is also true that many of the top execs of mortgage companies are now making millions..."

The former head of Countrywide Mortgage is making a killing in this REO market. The same market he destroyed with easy no doc, no down loans. Wreck them on the one side and bottom feed on the other...what a country.

[presjfk]

" Many of the people buying REOs are the same people that made money before the crash. They show up at auctions with cash made from flipping before 2008.
Posted by sjc_1"

That is true. It is also true that many of the top execs of mortgage companies are now making millions in the modification-property liquidation businesses. Those with money control business. It is not fair but that is how the world works.

[presjfk]

The issues with a foreclosure can exist with any home. What a bunch of BS. Buyers must be careful of any home purchase and do their homework. Duh.

[sjc_1]

Many of the people buying REOs are the same people that made money before the crash. They show up at auctions with cash made from flipping before 2008.

[hotwitch]

Interesting but short article. Buying at a foreclosure auction don't forget you'll be the one who has to evict any previous owners or tenants, you'll have to worry about the house being trashed, you may have to wait months before you can effectively take possession.

[windsgroup]

Buying a foreclosed home or a home stagnant on the market can be a value to home buyers but full of occupational health issues. We have seen an increase in water damage from moisture intrusion through roofs, siding, and basements due to neglect and maintenance. Other homes have a variety of issues including mercury contamination from thermostats and relay switches, fluorcarbons from refrigerations, and heavy metal contamination from solder on pipes affecting the drinking water, peeling paint containing lead, cadmium and other heavy metals, and asbestos-containing materials. Most foreclosed homes are NOT inspected for these potential health hazards by the typical home inspector. If someone is considering buying these homes, the buyer should seek the opionion from a professional consultant, who is certified by the American Board of Industrial Hygiene as a Certified Industrial Hygienist (CIH) or Board of Certified Safety Professional (CSP) and has residential construction and remediation experience. Where necessary, bulk, surface, or air testing should be done to evaluate the environmental conditions inside the home. A true professional can also provide insight on sources of contamination, water or moisture intrusion, as well as a plan to make the house habitable for all occupants, especially for the very young, elderly, and those individual compromised by disease or medication.