3/16/2012 3:59 PM ET|
Should you buy a foreclosure?
Foreclosed properties can be a great deal for homebuyers, whether they're planning to live in the house or rent it out. But they should know the potential pitfalls.
Michael Barton was just 19 when he bought his first foreclosure four years ago for $37,000. The Lincoln, Neb., resident said he realized he could pay less on a mortgage than he was spending to rent a six-bedroom house with his brother and three other people.
"I was paying $350 a month in rent and knew there were houses out there that would have a mortgage lower than that," Barton said. "My original mortgage on my first house was $315 a month, and I had my brother living with me paying $350 a month, (so I was) living for free."
Since then, Barton has purchased three more foreclosed properties to fix up and rent out.
By contrast, financial planner Diahann Lassus wasn't in the market for an investment property when she noticed a foreclosure for sale around the corner from her Bonita Springs, Fla., home.
After extensive research and number crunching, Lassus offered the bank 20% less than its asking price -- a discount that reflected the considerable costs necessary to fix up a house that had been empty for two years. Her offer was accepted, so she wound up paying $95,000 cash for a three-bedroom house once valued at $350,000.
The renovations cost more than she had expected -- about $45,000 -- and the return on her investment has been less than what she's making on her stock market investments. But she has "great renters" who are covering her costs, and she expects the home to appreciate over the 10 years or so she plans to own it.
Buying a foreclosure can be a great way to get a home for less, whether you're planning to live in the property or rent it out. The supply of foreclosures certainly isn't going to dry up soon, which means plenty of opportunities for home seekers and investors.
Plenty of pitfalls await the unprepared buyer, however.
"A foreclosure is not for everyone," said John Anderson, a longtime agent with Twin Oaks Realty in Golden Valley, Minn., who says about half of his business is short sales and foreclosures. "A lot of buyers are struggling just to get enough money" for a down payment and "don't have $4,000 to replace the carpet and $1,000 to repaint and $2,000 for new appliances."
Even for those who have some spare cash, it might not be enough to buy troubled properties that are too run-down to qualify for Federal Housing Administration or even conventional mortgages. Peeling lead paint can be enough to thwart an FHA loan, while more serious problems, like a roof that needs to be replaced, can stymie a conventional loan. In such cases, only buyers who can pay cash are considered.
"The buyer has to qualify for financing, but the property has to qualify, too," Anderson said. "The seller is not going to let you in to fix the property (before the deal closes), and the new bank won't let you close until the work is done."
Some properties simply need too much work to make much financial sense. A foreclosure might be $15,000 less than a comparable property, for example, but may need $30,000 in repairs and improvements to make it habitable. In such a case, the more expensive property "is a better investment, because the work is already done for you," Anderson said.
"Just because the price is low doesn't mean it's a good deal," he said.
Here are some other things to keep in mind when you consider buying a foreclosure:
Planning to flip? You might want to rethink that. People can, and do, buy foreclosed houses cheap so they can fix them up for quick resale. In falling markets, though, it can be hard for buyers, particularly amateurs, to do this successfully. If you don't get a steep enough discount or spend too much on repairs or don't find a buyer quickly, what looked like a great deal can become a cash drain. Many investors now are focusing on properties they can rent out for several years, so they can benefit from price appreciation when it eventually returns. Lassus recommends that foreclosure buyers be ready to hang on to a property for seven to 10 years.
Don't expect to automatically get a screaming deal. Some banks slash a property's price for a quick sale, which means you'll get the house for less than comparable homes in the area. Other banks don't offer much, if any, discount, and intense investor interest in a property can lead to a bidding war that drives up the price.
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Wish someone would buy the BoA foreclosure next to my house...
Weeds and grass are two feet tall, and cant get BoA to send anybody to mow the weeds...?
Tried calling them many times...
Next call will be to the Health Dept, for rodents, then maybe they will
cleanup their property..?
We looked for a house for about one and a half years. The RE agents always tried to push us toward the higher end. Finally after about five offers on short sales that fell through we saw an REO on the internet that was in an OK part of town. Only problem was that you could not preview the house. We made a lowball cash offer. After playing a little negotiation ping pong the bank said they would take our offer if we could close in two weeks. We got the house about $80,000 under market, built in pool, 3013 sq ft, 4 bd, 2.5 bath. The rational for the lowball was that we have seen a lot of torn up REOs. So we thought we would have to put a lot into it. As luck would have it, the former owner left it in good condition, just one crack in the cieling. I appealed to the builder who said the crack was not their fault, but fixed it anyway at no cost to us. We've put about $15,000 into paint, tile and carpet. We could probably make a quick $90,000 if we wanted to flip, but we'll wait two years and take the tax exemption.
In the past two years I have purchased 2 REO properties and a short sale. All three are rented with positive cash flow. Scheduled to pay off by the time I retire. Since no pension with my employer, this is my retirement nest egg. I couldn't be more pleased.
If it is a house you really want then forclusures are a great deal. However there is a downside, if the person that lived in that house before was was iresponsible and owed money to everyone, be prepared to deal with collection calls, strange people knocking on your door, and if for some reason they happend to have the same last name as you be prepared to have your financial information impacted by their bad choices.
I just wanna bacome a millionaire.
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