The foreclosed property offers new and veteran homeowners like you the chance to build your real estate portfolio. If you’re intrigued by the prospect of purchasing a property in foreclosure, I recommend you think about 10 things first.
1. Identify Your Motives
Why do you want to buy a foreclosed property? Maybe it’s located near your favorite vacation spot or in your preferred community. Perhaps you want to own a rental property or flip the house. When you identify your motives for buying a foreclosed property, you’re better able to plan and navigate the process.
2. Select a Savvy Real Estate Professional
All properties are not created equal. Select a buyer’s advocate when you hire a realtor who’s certified in Short Sales and Foreclosures. Remember, real estate professionals who represent the banks’ interests are very knowledgeable but may not work toward achieving your best interests.
3. Research the Market
In certain areas, foreclosures may comprise the majority of the market. Foreclosed properties may be scarce in your local area, however. With assistance from your real estate professional, do your research into the overall real estate outlook in your area and determine how many local properties are in pre-foreclosure and full foreclosure.
4. Beware of Single Unit Versus Portfolio Sales
Investors who specialize in real estate may spend millions of dollars to buy bundles of properties and resell them. If the idea of working with an investor as the middleman between you and the bank makes you feel uncomfortable, elect to deal directly with a bank or property management company instead.
5. Carefully Research Government-Owned Properties
If you’ve found a foreclosed home listed through HUD, the U.S. Dept. of Housing and Urban Development, or the VA, Veteran’s Administration, do careful research. These properties may include additional red tape, policies and forms that increase the frustration, cost, and length of the sale.
6. Determine Market Value
You don’t want to overpay on a foreclosure, so determine the property’s market value. While a fee appraisal is accurate, it could cost hundreds of dollars. Alternatively, I suggest you ask your real estate agent to prepare a more affordable Comparative Market Analysis. It contains the prices and information of similar properties sold recently, currently on the market, under contract and expired or removed from the market. Use the CMA data to determine the market value of the foreclosed property you want to buy.
7. Inspect the Property
Never buy a foreclosed property sight unseen. It could have been abandoned for years, abused by previous owners or in need of hidden repairs like a new furnace or additional insulation. Carefully inspect every nook and cranny of the property as you determine if buying it is a good value or not.
8. Calculate Repair Costs
In the best case scenario, the foreclosed property needs only minor repairs. However, if major repairs are needed to make the property inhabitable or resalable, obtain estimates from several reputable and licensed contractors. I also recommend you add 10 to 20 percent to cover necessary costs that crop up during the repair process.
9. Prepare Your Financing Documents
No matter how much it costs, you must obtain proper financial documents that prove you have the cash or financing needed to buy a foreclosed property. Ask your bank to prepare a Proof of Funds letter if you plan to pay cash. If you’re financing the purchase, ask for a Pre-Approval letter. It details the loan process, including your creditworthiness, employment, down payment, and closing costs.
10. Be Patient
Even with all your paperwork in order, the settlement process may take what feels like forever. Understaffed banks and management companies, title issues, paperwork requirements and other challenges may hold up the process, but trust me, patience is a virtue that will be rewarded. Stay calm and communicate regularly with your real estate professional as you wait for the foreclosed property to finally be yours.
Now that you know these 10 things about foreclosures, you’re ready to take the next step. Good luck, and enjoy searching for new property to add to your real estate portfolio.
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