Jackson bought a bank-owned three-bedroom, single-family home with one-and-a-half baths in the Chatham neighborhood of Chicago.
"I made an offer the second day after it went on the market," says Jackson, who was working with a real estate agent. "There were a couple of bids thrown in the day after I contacted the bank. Another day of waiting -- I probably would not have gotten it."
Jackson didn't know much about buying foreclosures before putting in a contract for this home. He'd spent the previous five months reading online articles about how to buy a foreclosure and asking questions of his agent before bidding on this one. He ultimately put in an offer that was 15 percent under the $57,000 list price and the bank countered two days later around 10 percent under. He bought the move-in-ready home for about $52,000, closing two-and-a-half months later.
"The home only needed minor cosmetic upgrades," he says. "I got lucky with this one by bidding reasonably."
Buying a foreclosed home may seem to some like a scary process, but as was the case with Jackson and many others, it's similar to buying any other home, especially if your offer is on a bank-owned property versus one sold at auction (which can be a tricky process for the inexperienced).
There are, however, many nuances that any potential buyer has to be aware of when dealing with foreclosures, such as checking for liens against the title, or knowing that on a foreclosure "even something as simple as cracked paint can make an FHA loan impossible," says Twin Cities foreclosure expert Tim Kindem, a Keller Williams realty agent.
Here are some other very important basics about buying properties in foreclosure.
Where to find foreclosures
Finding foreclosure deals in your area can be simple, and worth a try for first-time homebuyers or those wanting to get into real estate investing. Here are some ways of locating foreclosures:
- Leading real estate portals like AOL Real Estate have local foreclosure listings.
- Bank websites sometimes list properties in their possession that are for sale.
- Asset management companies hired by lenders to handle foreclosures offer a list of available properties.
- Auction companies often hold auctions in which they sell huge volumes of foreclosure homes on a single day.
- Real estate agents can point to foreclosed homes in your area.
- "For sale" signs in yards that say "foreclosure," "REO property" (Real Estate Owned property) or "bank owned," indicate foreclosed homes.
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Negotiating the contract
Determining the right price
After finding a foreclosure that you want, a key step is negotiating the right price. In most cases, foreclosed homes are already discounted from their appraised value, but you can still negotiate down from list price as you would with any home.
When there are a variety of foreclosures on the market, buyers can sometimes get a below-market price as much as 50 percent less than it would normally sell for, although a typical price is usually only 5 percent less.
In order to estimate a potential discount that you can get on a foreclosed house, you have to know its market value as well as the amount of any loans or liens that the property may have against it, as this will give you an idea of how much the bank will make or lose by selling the property.
The discount means built-in equity, but also it should help make up for any repairs and maintenance that may need to be done if the house has been vacant for a while or otherwise not properly maintained.
"Consumers have the ability to negotiate repairs even if they agreed to buy the property 'as is,' " says Rebecca Gallardo-Serrano of Portelo Realty in San Jose. "When REO brokers post 'no repairs,' including no water heater strapping or smoke detectors," they could be in violation of the law.
"Some banks are willing to shell out thousands of dollars to make repairs to help get a home sold," says Kindem, but only if the buyer asks. "The agent listing a bank-owned home isn't likely to fight for these repairs for you, so consider having your own skilled buyer's agent represent you."
Make sure that your real estate agent is skilled with the REO foreclosure process. A way to find out is to ask agents how many successful offers they have written for foreclosures, advises Minneapolis-area mortgage specialist Jay Dacey. But don't take their word for it, he says. "Ask for a list of past transactions that they have completed, otherwise you could waste months of your time waiting to hear if your offer was accepted, only to find out that the agent didn't submit the proper documentation to the bank."
Financing a foreclosure
"Many popular loans first-time buyers use, like FHA loans, can't be used because they require the home to be in a certain condition," says Kindem.
"Fannie Mae offers certain streamlined mortgage options, often requiring lower down payments and even waiving the need for an appraisal," says Dacey. Find a local mortgage expert who is approved to offer products like Fannie Mae's "Homepath." A good mortgage broker, in conjunction with your agent, should be able to help point you to down-payment assistance programs and city or county loan programs for rehabbing fixer-uppers.
Search for foreclosures in your city at AOL Real Estate's Foreclosure Center.
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