How to 'steal' a house
In some high-foreclosure cities, houses that used to cost $250,000 are now selling for $70,000. Here are 4 steps to buying a bank-owned property.
Depending on where you live, the housing market is a depressing subject for homeowners, but exciting for those looking to buy.
"In 30 years, I've never seen a market like this," says Denny Grimes, an agent in Fort Myers, Fla. Because of a glut of foreclosed properties, it's possible to buy a house here for $70,000 that three years ago might have sold for $250,000.
Money Talks News recently visited Fort Myers to learn how to bottom-fish in one of the nation's worst -- or best, depending on your point of view -- housing markets. Watch the video below, then read on to learn how to "steal" a house.
While some would argue that these homes were never worth their bubble-era prices, there's no argument that they're now selling for significantly less than it cost to build them.
And the party's hardly over. According to real estate website RealtyTrac, there may be even more foreclosures in 2011 than last year. In places like Fort Myers, nearly one in three houses are still empty.
- Calculator:Should you rent or buy?
But getting a steal isn't as simple as it might sound. It requires additional homework. It also requires something that isn't part of the traditional home-buying process: speed.
Now let's explore two options for buying houses super cheap. Each has different hurdles.
As Stacy Johnson mentioned in the video, buying a foreclosure at judicial auction (as opposed to the heavily advertised public auctions you see at sites like Auction.com) will often net the lowest price. But buying this way isn't anything like the typical process.
- Auctions often require a 5% to 10% deposit before you can bid.
- Once you win, you need to pay in full, typically within 24 hours. Which means, of course, there's no time to get a mortgage. And if you don't show up with the money? Kiss your deposit goodbye.
- It's often impossible to do more than a drive-by inspection. Many homes sold at foreclosure auctions are still occupied, so there's no opportunity to see the inside, much less do a thorough inspection of the roof, foundation, heating and air conditioning, etc.
- Depending on the state where the auction is held, you may face hidden mortgages or liens. You can read about how one woman almost paid $14,000 for a foreclosure property that came with an outstanding $140,000 bill in "How NOT to buy a foreclosure." You can avoid this by paying $50 to $200 for a title search on the property before you bid, but that's more money up front with no guarantee of winning the house.
- The competition for these houses is often fierce. You could be bidding against well-heeled investors with a lot more time, expertise and cash than you're bringing to the table.
- Calculator:How much house can you afford?
How it's done:
- Learn to recognize a steal when you see one. Buying a home cheap means knowing what "cheap" is. When a below-market REO comes on the market, you're going to have to make a snap decision. So learn values beforehand and find an agent who's plugged into the REO market.
- Be preapproved for a loan. In addition to knowing a bargain when you see one, be ready to pay for it when you find one. That means having financing preapproved. See our story "Follow these 3 steps to save thousands on your next mortgage."
- Be ready to pounce. "If it's new on the market, it's not something you can look at on Friday, sleep on it, and think about making an offer on Monday," says Grimes. "By then, there will be several offers and it's a bidding war." If you think you've found a bargain, Grimes suggests putting in an offer immediately because "it's important to control the property before worrying about the details." In most cases, the offer is contingent on an inspection anyway, so "once you get it locked up, you can go through due diligence and if you think you overpaid you can back away."
- Bid as high as you're willing to go. When buying the traditional way, the game is often to come in far below asking price, then see if the seller either accepts your offer or counters with a different offer. The REO game has nearly opposite rules: You might offer more than the asking price because the competition for bargain homes is fierce. How high do you need to go? "I was working with a buyer last week. We went 10% over asking price and thought we were good, but we were outbid," says Grimes. "The bottom line is the buyer has to make their strongest offer first."
More from Money Talks News and MSN Money:
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There is no such thing as preapproved. Each loan is approved on a specific property after an appraisal is completed and usually a property inspection. Many homes being sold way "below market'" have problems such as damaged plumbing, stripped wiring, and general neglect. As always, buyer be ware.
I agree with the previous comment, from: rftbss:
Let me add, there are responsible hard working people who bought homes and have been laid off or are "underemployed" and have a 401K or IRA that has a balance which can pay off their underwater mortgage but cannot due to rules/constraints (10 percent penelty, and taxes). Why is it that our government will not allow a one-time waiver on the penelty and taxes in order allow these people to pay off their mortgage? No, they'd rather have these people walk away from their mortgage or if not walk away, these people are forced to pay more for their property due to the mortgage interest their paying every month.
Ooops.......sorry....I just remembered......we have to fund the "war machine", high property taxes to subsidize families which have children in schools and do not pay property taxes (because they rent), social programs (e.g., planned parenthood). My wife and I paid high college tuition for our daughter for 4 years and part of that tuition money paid for foreigners to attend the same school for much less $$$. And, the list goes on and on.
AngryCardHolder - you make me sick. There's nothing wrong with getting the best deal you can on a house. Those people shouldn't have bought what they couldn't afford. Our first house was bought from a lady who was divorced, and couldn't afford the house any more. She had bought it on a contract-for-deed (something you should never do) and the deedholder wasn't making the payments. She couldn't afford to buy the house, so up it went for sale. We drove a hard bargain and she accepted.
I can't help it if someone doesn't make good money decisions. I'm going to get a good deal. That's the way it should be. What's your answer - more worthless government programs?
Those who are making comments about paying more for a home than it is worth are missing the picture. Most buyers pay what the home is worth (this is defined as what a willing buyer and seller would agree to). "What the house is worth" has CHANGED. It may not be worth a price to you, but if there is a willing buyer who will pay $100,000 more because Elvis slept there, that creates VALUE. Why would a seller take less? Now, competition has created deflation in housing prices, affecting VALUE. Supply and demand.
Yes there are people who pay more than anyone else would. Those people lost more. That is not what is driving this crisis. It is that some people bought homes they could not pay for and mortgage lenders packaged and put a bow on the loans and sold them as low risk investments. Once the investors got wary they stopped lending and business and the economy suffered. Then people started losing their jobs.... ...
Purchasing a property. At least put down 10-20% of contract value and mortgage company appraisal. Be pre-approved with a letter from lender stating your Lowest approved amount. We have owned 7 homes since 1971 and always choose an interest only, adjustable rate mortgage. At present we have a 4.5%, 5 year adjustable. We will refinance in 4+ years if it makes sense to do so at that time. We have always invested the extra money we would have paid into fixed mortgages at higher than our mortgage rate. Our investments are paying just over 7%.
Your home is not an investment, it is a place to live and should never be looked upon as an asset. We are not so smart, we have invested with the same investment counselor for almost 20 years and he always has us invest in solid instruments that preserve our principal and make us solid returns. We are retired and can not take risk on losing principal.
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Sure, you love your stuff. Keep buying it, but don't get sucked into paying a premium when perfectly good cheaper alternatives are available.