6/24/2011 5:47 PM ET|
Foreclosures: Bargains for investors?
Bank-owned properties have become increasingly lucrative for real estate investors, but potential obstacles remain for those seeking a deal.
Stephanie and Jay Herbert briefly considered selling their Alpharetta, Ga., home to upgrade to a larger house in September 2009. But instead of selling, the Herberts stayed put, updated the exterior of their home and used the money they set aside for a new house to buy two more houses, one a foreclosure. The Herberts now rent out the properties for extra income.
"It was always in the back of our mind that we wanted to buy a rental home and keep it long term for retirement," says Stephanie, a 36-year old homemaker. "We just thought now was the time to take advantage of getting a good deal on a house."
With home prices at historic lows and distressed properties selling at discounts of 35% or more in some parts of the country, scooping up bank-owned bargains has become increasingly lucrative for real estate investors. "If you have some money, the smart thing is to buy (foreclosures) as investments," says Jim Gillespie, CEO of Coldwell Banker Real Estate. "Once they hit the market, (they) sell pretty quickly because they're priced so strong."
While the demand for foreclosures continues to grow, real estate investors face a host of challenges when it comes to closing the deal on distressed properties.
Buying a foreclosure can be a long and arduous process, according to the Herberts, who waited three months for the keys to their foreclosure purchase. After the bank accepted their offer, the Herberts were told the bank didn't actually own the property and therefore couldn't sell the house.
"We had sold our stock and had this chunk of money, because we had to pay 20% down," she says. "Then, all of the sudden we were told the bank couldn't get the title because they didn't own the property. It was really disappointing." The Herberts learned this after paying for inspections and preparing to renovate the property.
Eventually, the Herberts got the house, but not before plenty of back-and-forth between the bank and real estate agency. "It was just a big mess. Buying the foreclosure was the biggest pain," Herbert says. "It was a great price, but not a good experience."
Buyers can also run into problems when it comes to financing foreclosures. Qualifying for a loan is tough in this market, but it can be even harder if the mortgage is for a distressed property, because lenders have higher standards for the homes they finance these days. "Your credentials need to be much stronger," says Keith Gumbinger, vice president of mortgage information website HSH.com. "Expect to put down 25% or 30% on the property, and expect to pay higher fees to get your mortgage."
Many lenders also expect real estate investors to demonstrate that a foreclosure purchase intended to be a rental is in line with market demands and comparable rental properties. "You might have to come in with some market analysis of what supported rents are for comparable properties," Gumbinger says.
The valuation of a property can also derail would-be buyers. If a house's list price is higher than its appraised value -- for example, if the purchase price of a home is $200,000 but it appraises at only $180,000 -- many lenders won't pony up for the extra cash. If negotiation with the seller isn't possible, buyers may have to come up with a larger down payment.
"Valuation really does matter," Gumbinger says. "If you think the property is worth 'n' and the seller is selling the property for 'n' and you think you can rent it out for 'n,' you may have to demonstrate both of those things. The burden of proof may end up being upon (the buyer)."
VIDEO ON MSN MONEY
It seems like the Banks (or owners of these properties) would be less strict on people that wanted to purchase a home? Put down 20-30%, have good credit and sign papers. What does
the bank have to lose? If the buyer defaults, the bank still made out. So why PROVE anything? Maybe the Bankers are the problem? Who would have known?
I think many of Americans are investing in foreclosure......
Many lost their jobs, cant make the payments, the banks taxpayers bailed out, not willing to work with them...
And Just waiting for the foreclosure papers to hit the mailbox....
Keep talking. Someone may start to listen. The bank owned properties are just that - BANK OWNED. They are in the process of OWNING AMERICA !!!!
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