Foreclosure buying checklist
Buying foreclosures can look very complex compared with conventional house-buying but there is no reason why someone with limited knowledge of the process can’t take advantage of this prime source of bargain properties.
1. Prepare to act quickly
Foreclosures are generally the result of the previous home-owner defaulting on their mortgage or loan payments. The lender, having given the borrower a substantial period to make their loan current and up-to-date, will have had no other course of action other than to seize the property and put it on the open market in order to recoup their losses. The lender needs to convert the property into cash as quickly as possible and so they will ask for bids to be made sometimes in a sealed bid auction and sometimes in an open auction but always in a very short period of time.
Although successful buyers will probably be given up to thirty days to organize financing it is prudent to make sure that you have either ready cash available for the purchase or agreement in principle for a mortgage or loan.
Additionally you should make sure that you qualify to bid on the property. This may be as simple as registering but could involve earnest money and other paperwork being completed in advance of the auction.
2. Draw up a specification
House-buying can be a very emotional activity. It can be difficult to walk away from a deal that is going sour or from a property that you have fallen in love with. If you take the precaution of drawing up a specification of the type of property that you are seeking, its size and location, the purpose to which you intend to put it; i.e. as a home or as an investment, your maximum budget for purchase and renovation and the profit you would like to achieve if you are reselling it can all act as a useful brake on your impulsion.
3. Draw up a long list
Use as many sources as you can to find appropriate foreclosures. Your local newspapers and local real-estate agents will have information about foreclosures and the internet is alive with websites, both free and pay sites, which have information about foreclosures across the country.
Select properties that appear to meet your criteria outlined in your specification and read the details carefully. Although sellers are expected to declare major problems in the sales details, they may use unclear language, so it’s worth picking up the phone if you are suspicious. This will allow you to reject inappropriate properties from your list and should leave you with one or more attractive propositions.
4. Get mobile.
Get in your car and go visit the properties on your reduced list. Train your eye to assess the condition of a property by what you see outside. You won’t always be able to get inside without permission but this first cursory inspection will help you to assess whether it’s worth considering a property for purchase.
5. Have a professional assessment carried out.
By this time you’ll be down to one or two properties that you want to get really serious about. It’s best to use the services of a professional or two who can assess (1) the amount of work necessary to bring the property back to full market value and (2) roughly what that market value would be. These two figures will begin to suggest what your maximum bid price should be.
Market value = all purchase costs (including bid) + refurb costs + profit
6. Bidding
At an open auction it is not always sensible to start with the lowest bid but neither should you wait until you have no room to maneuver near your maximum. Try and remain unemotional, judge how the bidding is going and join the bidding when it is nearing its close. If the bidding goes well beyond your maximum just walk away, auctions get crazy sometimes.
In a sealed bid auction, like HUD auctions, your initial bid may be rejected along with all others after 5 days purely because the net acceptable bid has not been reached. You may still rebid each day thereafter and, if you are tenacious you may benefit from a reduction in the level of an acceptable bid at the end of the 10 day auction period.
Keep your head and you’ll end up with a bargain. Lose your head and you could end up with a turkey and no profit.