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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.

By Stacy Johnson Apr 8, 2011 1:36PM

This post comes from Brandon Ballenger at partner site Money Talks News.

 

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.

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.

 

Judicial foreclosure auctions

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.

Read "How to buy a foreclosure" to learn what the pros do. To learn more about the auctions you see advertised on TV, see "Real estate auction warning."

 

Real estate owned properties
When a bank assumes ownership of a house through the foreclosure process, it becomes what's known as a "real estate owned" property or REO. Because banks are in the business of lending money, not managing property, they often want to get rid of these homes fast. They sell their houses the same way you'd sell yours: They hire a real estate agent and list it. Unlike the way you'd market your home, however, the bank often does nothing to fix it up. They list it as-is, and to facilitate a quick sale, sometimes price it well below other similar homes.
This is the market we talked to Fort Myers agent Denny Grimes about. As he explained in the video, the REO market can net you a steal, but you can't approach it with the same slow, methodical process you'd use in the traditional homebuying process.

 

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:

15Comments
Apr 8, 2011 7:48PM
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It is not a matter of pre-bust prices verses current prices or whether you could afford the loan. The issue is replacement value, i.e. what would it cost for materials and labor today to build the same house? Today, the average market value is 50-60% of replacement value, which makes no sense. How do these numbers happen, simple the banks are selling foreclosed properties at or less than the amount of the mortgage. As more houses foreclosed or not come on the market the price continues downward. No one in Congress, the Fed or the White House cares that the wealth of the middle class is being stolen by the banks. Just because you have a job and don't plan to sell or refi your home doesn't mean you shouldn't care. They are stealing your hard earned money. Speak up, do something about it. Get rid of your Congressman who are all on the take from the banks. They shouldn't be arguing over ideology they should be fixing the damn economy!!
Apr 8, 2011 8:26PM
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I love the amount of comments about "you shouldn't buy more house than you can afford" or the "don't finance more than it's worth" comments. I bought my house in 11/07, paid less than the appraised value, put $40K down (10%) and today it is worth almost half of what we paid for it. At the time I had a middle management position with a Fortune 50 company making $110K a year but after I was laid off and the economy/housing market busted, I am now left with a house that I am struggling to pay for and all of the programs that are out there to "help" only help the morons that helped create this situation.
Apr 8, 2011 3:44PM
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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.

Apr 8, 2011 9:49PM
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Housing prices were over priced by 2000. The housing drop should not have been a surprise. Prices were jumping 20% a year - ridiculous!. Where was the increase of people reaching buying age to match this - there wasn't.  All this home buying was based on phony loans and hyped speculation.
Apr 8, 2011 5:03PM
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Definitely true about making your highest offer.  It's very competitive out there, and often you are competing against investors or contractors with cash offers.  

And yes, buyer beware.  All of the homes we have looked at have been completely trashed, neglected, and often with temporary walls built up for more rooms.  We have to just try and imagine the home with new carpet, a clean kitchen, and less poop on the floor.

And not all of us are out to profit off of these poor people losing their homes.  Some of us are families, looking to buy for the first time in a nice neighborhood we would not normally be able to afford, even though we both work.  That's the Bay area for ya, I guess.

Also, have cash saved up.  We may have to pay the back taxes that these people living in their home for free for two years have not paid.  In the end, we hope, it will be worth it.
Apr 9, 2011 2:10AM
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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. 

Apr 9, 2011 7:43AM
Apr 8, 2011 5:40PM
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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?

Apr 9, 2011 2:33PM
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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.... ...

Apr 9, 2011 6:29AM
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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.

Apr 9, 2011 5:23PM
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For all of those that are fortunate enough to purchase a home at a rock bottom price because you were lucky enough to be in the right place at the right time verses those who purchased five  years ago at the wrong time and wrong place owe it to all to pay if forward. Perhaps you could donate money if you have any left after making your purchase or some time to a homeless shelter in your neighborhood.
Apr 8, 2011 7:27PM
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I didn`t buy a house I couldn`t aford! I lost my house to forcloser.I lived there almost 29yrs.It needed work done so i used all my back disability and took out an ARM loan to fix it up based on what I was told the home`s value was.I finished the work keeping the price down by putting as much of my own labour into it as possible.When I finished and went to refinance it was way upside down.I tryed modification many times as the loan payments went up and up but was denied each time.The home was valued at over 238,000 in 06 by the time I went to refi it had gone down to 98,000 and they sold it for only 56,900. The Bank lost a great deal of money from foreclosing but got the help of our goverment,I got no help and am homeless. This stinks! I hate the Banks and the Goverment ! We need to have an investigation of all involved and hang anyone who contributes to this mess including vultures who buy forclosed homes!
Apr 8, 2011 7:51PM
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It's not the bank's fault you were upside down. You should never have financed anything for more than what it's worth. That's why new car loans are a BAD idea. I don't love banks, but people have to have some common sense. NEVER put yourself in a position where you owe more than something is worth. NEVER!!
Apr 8, 2011 4:29PM
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Yep that's the scum we have running around in today's real estate market!
Apr 8, 2011 3:58PM
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Yes what a wonderful article.  How to profit off the despair and losses of your fellow man.  How very Christian of all of you.
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