Several tips for buying foreclosures
Foreclosures have infiltrated all levels of the housing market. From shacks in sketchy neighborhoods to suburban vanilla homes on cul-de-sacs to the most glamorous of luxury mansions….any type of house you can imagine can be found up for auction at the courthouse steps. Right now, there are 1.5 million such homes for sale, and prenty more are expected to come down the pipeline throughout 2010. That provides both opportunities and pitfalls for bargain hunters.
I have helped several buyers navigate through the foreclosure purchasing process, and over the years have purchased a dozen foreclosures for my own investing purposes. Here are a few tips that may be helpful to people looking for a bargain:
1) If you have not purchased a foreclosure before, get help from someone who has. Anyone from the general public can go to the courthouse steps and bid on the properties that come up for sale. Here in Charlotte, if you have 5% of the price of the home bid, then you can potentially be the highest bidder. Many people don’t know, however, that your winning bid could have been on the house’s 2nd mortgage, or the house you just won may have other liens or debts on the property superior to the debt you just erased (overdue property taxes, federal tax liens, other superior mortgages). A person who has successfully navigated the process before and has recent experience with the system is invaluable.
2) Pay for a title search. Pay an attorney to do a title search prior to putting a bid on a property. Title searches usually take 2-4 days and cost $50 – $200. The attorney can confirm what debt you are bidding on and what other superior debts there are.
3) Determine the home’s potential value. Work with a real estate professional who can tell you what the house might potentially sell for on the open market. You may want to evaluate different scenarios (not fixed up – its “wholesale price”, or fixed up – its “retail price”).
4) Try to get in the house. Houses in the process of forclosure are still owned by the person getting foreclosed on. In many instances, these houses are not available for people to see the inside. Sometimes, though you can get a sneak peek so that you can know the condition of the house. The owner may have the house up for sale. In this instance, you can have a realtor get you in to see the inside. The owner may have previously tried to sell the house…if so, there may be interior pictures available online (ask a realtor to check). The house may be abandoned by the owner and empty. In some cases, they may have left a door or window open, or a neighbor might have a key.
5) Its not always the best to be the first bidder. The foreclosing bank will be the first bidder. After that, the bidding process is open to anybody interested. The advantage to bidding right after the bank (at the time of the initial bid) is that you can bid $1 over the banks bid. However, the disadvantage is that you may have not had time to do a title search or determine if the bank’s initial bid is low enough for it to be worth your while. Did you know that in Charlotte, anybody can up the bank’s bid over the next 10 days (from the date the bank initially bid)? The disadvantage to this tactic is that after the time at the courthouse steps when the bank initially seeks other bids, then if you want to outbid the bank, you have to raise the bid price by a minimum of 5% or $750, whichever is greater.
6) The bank’s offer at the courthouse steps is not always a good one. Over the past few months, I have been shocked at the banks bid is at the courthouse steps. The bank has been putting initial bids for properties higher than the market value of the property. These are DISTRESSED assets and the initial price should reflect this status. However, the banks around here seem to be in some sort of denial right now. For instance, a house in Concord recently went foreclosed. The house is probably worth $60,000 at today’s prices if it were fixed up and marketed property. The debt that the bank was foreclosing on was $80,000. The bank’s initial bid was $89,000, which reflected the full debt amount plus penalties and extra fees. Needless to say, nobody bid on it except for the bank. A few weeks later, the bank employed a realtor who went in and analyzed the condition of the property. He concluded the house was worth $42,500. The house appeared on the MLS for this price, and within days the house had 3 offers on it. Conversely, in Nevada and California banks are many times opening with bids of 30% of the mortgage debt on the house. Do the numbers first to figure out what the highest you are willing to pay.