At the moment my husband and I are planning to purchase our first home. One appealing aspect of it is that we will be paying cash.
This means that before the age of thirty-five we will have a house paid for in cash.
That is exciting and gives us a bit of wiggling room. Since we are keeping foreclosures on our list, I figured I would share some tips I have found and some that I have learned since we started our search.
What is Involved with Buying a Foreclosure Home?
1. Expect to See the Air Conditioner Missing and Clothes Lying Around
I was shocked to find that when people leave they will leave it a mess, leaving behind the most random things. One house even had photo albums left behind.
We haven't been in a single house that was left decent after a foreclosure.
The oddest thing I have seen taken was the sliding glass door.
2. Expect the Unexpected
I cover my nose with my shirt when we go into a foreclosure home that we have never been to before.
Many times we have been to homes where they let animal feces on the carpet before moving out.
If the home has been foreclosed for a while, you don't know what kind of animals are living there. Beyond animals, consider if any other damage may have happened.
I know that in the state of Texas when the homes are winterized, there will be a notice on the door or nearby the door and the fixtures as well. If they do not have these signs, then there could be busted pipes.
Also, the people that had the foreclosure done lost their home because they didn't have enough money to maintain it. More than likely, they also did not have enough to do repairs on the house either.
As you are purchasing the home, consider if you want to do the repairs yourself or if you are going to have to pay for someone else to do the work. This will affect your total cost of the home.
3. There's a Good Chance You Will Have to Pay Cash
The first home we fell in love with was a yellow, two-story home on fifteen acres. It cost $140,000, and we were about thirty short at the time.
What did we do? We went after a home loan.
The home should have been worth $300,000, but at that time it was worth about the price it was on the market for.
What did they do? They declined us, noting that the home was a foreclosure and needed a lot of work, including a sliding glass door!
Paying cash has benefits though because you have more negotiating room.
4. You Could Double Your Profit
If you look on Zillow, they will give you an estimate of what the house should cost once it is restored. I have seen $110,000 houses which, when cleaned up, would value close to $300,000.
Putting in the work could be fun or challenging, depending on your view. There is profit to be made in these homes- no matter if it is the profit of making you happy or financial gain.
5. Learn The Area, Read the Rules
One of the homes that we looked at was in an upscale area. From the looks of the house, it was grandfathered in when the home became a subdivision.
The home would be profitable, but our issue was the HOA rules. We could only do a particular style of fencing; our garage had to look a certain way.
Too many restrictions. If that is a concern, be sure to read up on the area.
6. There are Four Types of Foreclosure Homes
The types of foreclosure homes include: pre-foreclosures or short sales, auctioned, real estate owned and government owned.
I will talk about auctions and REO homes here in a bit.
The first of the four, pre-foreclosure, means the people are working with the bank to sell it below market value. They currently still live in the home despite the fact that they can no longer make payments. This sounds the best since they are working with the lender.
With pre-foreclosures, you will be able to use traditional loan methods as well.
Just be aware that a short sale does not mean that it is a quick sale- it could take up to ninety days for the process to be complete and then you still have to wait for the current owners to move out!
While it is still sold as-is, the buyer may also have the right to have the home inspected before you purchase.
For the government-owned, there is much more paperwork to go through and, while they may assist with financing, they expect cash up front to purchase these homes.
7. REO Homes
If you are looking for a home in the REO stage of foreclosure, they will not state any damage that they feel important for you to know. The reason is that these homes have been vacant the longest.
You may also have the least value here and the most competition because this is the part where they get seen by others as well.
These are the homes that are sold as-is meaning no repairs can be made before you purchase the house; however, most of the time the issue addressed in number eight is already taken care of.
That being said, the home is typically at market value for its situation, which means the lender could even make a profit.
8. It May Cost More than You Realize
If you purchase a home that has taxes that haven't been paid, you may be required to get them up to par. Same thing if the house is in an HOA and the previous owners have not made payments.
Again, this is where it is essential to do your research before you purchase.
9. There is Competition
Where I live, this is especially true. Many times though we are not in competition with people looking to purchase a home, instead we compete with companies that see an “easy flip.”
Be prepared to lose some and don't get attached too quickly.
10. Auction Homes
One way to get in the game and see how competition is in your neighborhood is to check out sites such as Auction.com. My husband informed me that they do it one of two ways on sites like this:
- The first way is to have a set minimum. Even if the house goes up for auction, if that set minimum isn't met the house doesn't get sold.
- The other way they do it is legal and is done to be “fair.” While there is no set minimum, they will have a team that works with them, helping to up the bid to a certain point. This helps that team get the number they need.
You also need to remember when going through an auction site; it will most likely be cash only. Not to mention many of the things that we talked about, such as inspections and history disclosures are not given prior to selling.
11. The Closing Process
Once you have made your decision to purchase the home the closing process will go a bit differently than other homes.
I highly recommend that you get an inspection done beforehand so you know of any issues you might come across instead of being surprised.
Also, you should run a title and search report that goes as far back as possible. The reason for this is because, again, you don't want to get caught unexpected.
This time you will not have to go through a disclosure process either because the bank people have never lived at the home and do not know anything more than you do.
12. People Can Help You
If the process seems a bit daunting to you, there are people out there who can help you.
Look for a real estate agent who specializes in foreclosures. Many of the steps you have to go through at the end can be done by the agent since they know the business and people in it.
13. Know the Market
Doing your research on similar foreclosures gives you a leg to stand on when you are negotiating the prices. It's hard to come in with a “half-priced” offer when you don't know the market. On the other side of that, you may have a house worth $140,000, and you can get it for less because you know the market and how long the house has been for sale.
I had some friends who bought a house for fifty when it listed for one hundred and ten thousand. The home had been on the market for two years.
This is also important when you think about pre-foreclosure homes. Sometimes the owners price it higher to sell their home and pay off debt.
Being knowledgeable helps in many different ways.
14. The Previous Owner
Depending on the circumstances, the previous owner may still live there. This would be the case with the pre-foreclosure homes, but sometimes this happens later in the process as well.
Recently we looked at a home that had the owners still living in it. We found it on an auction site and went to look at it before we dropped a bid.
Once you obtain the property, you can have the police come out to have them evacuate. That being said, depending on your state, this could take a while, and you may encounter legal fees.
15. Get in Early
If you can talk to the bank shortly after the foreclosure happens, you might be able to catch a house before it goes up for sale on the market.
If the bank is small enough, such as a community bank, they might be more likely to get it off their hands quicker to save the hassle of the process.
16. See the End Results
One of the things that make Fixer Upper so popular is when they can draw out Joanna's design as she's speaking them.
Likewise, when you walk into a foreclosure home, picture the result in mind. Do you want a luxury home or a starter home? These are both available in foreclosure homes, but you have to see it to believe it.
The process of looking for a new home is exciting but looking at a foreclosure home means you have different emotions.
There is the grossness of seeing all the issues beforehand but still being able to visualize the beautifulness that lies within.
It is essential to do your research or be willing to pay for someone that knows these aspects.
No matter what you decide, the day will come when you are sitting on your couch and think it was all worth it.
When that day comes, be sure to share it with us!