Feb 17 2009
Foreclosure- What Constitutes a Good One?
Everyone seems to think that with foreclosures they are going to get the deal of a lifetime. But the road to foreclosures is riddled with traps like those in the Vietnam War with spikes at the bottom of a pit. Here goes on my top 10 list:
1. Condition of the property. I have seen where the people that were forced out took virtually everything including all of the cabinet hardware, plumbing and fixtures, electrical and light fixtures. What was left was a shell of a house. You have to do a budget and prioritze what you will have to fix and when. Remember, banks or foreclosure companies sell the property “as is” and will do absolutely nothing to fix it up. They will spell this out in lots and lots of legal paperwork.
2. Outright damage to the house. I have heard where people put cement down the toilets or let animals pee all over the hardwood floors, or left animals in the house to die after they tear up the house. This is cruelty to animals but it is the house that suffers too from abuse. I once showed a house in the dead of winter where two raccoons had moved in for warmth and then froze to death. Hard as rocks in February but stunk in May when we finally closed.
3. Financing the house. Few lenders want to take on these “projects” unless you have a long history in construction and can back up what you say. Banks do not want these back again, now ripped apart AND unfinished, so they are very slow to lend on them.
4. The Lender. The lending institution will have to give you some kind of either a construction loan or an “in house” loan because the house loan cannot be sold on the secondary mortgage market in its present condition. There are some great loan situations out there for these properties but they can be a nightmare for paperwork, appraisals and the like.
5. If you can pay cash or have someone buy it for you and then sell it to you on a contract (a third party contract) this may be your best way to go, provided the seller will let you do this. Since it is a cash deal to them, they should but they can be real sticklers about this kind of transaction.
6. Money - You will need plenty to fix up the property. You may be able to finance this into the loan IF you borrow what it could appraise for when finished. Also right now it is highly likely you will need 20% cash down on the property at closing and this money will have to come from savings and cannot come from the equity in your residence, as it could just a short time ago. Because of the national banking crisis, lenders’ pockebooks are tight and they are requiring large downpayments and high credit scores.
7. Paying too much for it. You could be paying off a first and second mortgage or even a third mortgage in the purchase price. Your agent should run a market analysis for you for what the house should cost in good condition; what it will possibly appraise for when finished. Your lender will require an appraisal in order to lend to you but appraisers are oftentimes appraising low so what you can borrow will be less. If you cannot bargain down on the price a lot, a foreclosure may not be the best buy for you. Some mortgage lenders draw their line in the sand on the price and you just about have to let them keep the house for a good long while to get the price down. Even after months some lenders refuse to budge off their line in the sand.
8. Take a good look at the neighborhood. Are there a lot of homes in foreclosure? A plant may have had a lot of layoffs and particular neighborhoods got hit the hardest. Not all of the foreclosed houses will be sold or fixed up and may be boarded up. If neighborhoods are deteriorating you need to be very aware that values on houses are dropping too. You could have a cream puff in a bad location.
9. Squatters. In big cities, supposedly, people are moving into foreclosed homes to live in because they are homeless. I have heard of such a thing in my smallish community but have heard about it only annecdotally, have no hard proof. Regardless, these folks are likely to damage what is there. Check things out with the local police for crime statistics. Do they have reports of breaking and entering? Squatting? What are the crime statistics in the surrounding neighborhood. If you go in and fix up a house, would you want to live in that neighborhood when you are done?
10. So what constitutes a good foreclosure property to buy? Good location, not too much damage to the house or things you can fix up within a reasonable budget. A house where damage is not ongoing or continuing. A seller that will go to the bargaining table in good faith, willing to bargain down on the price.
Happy house hunting. SusantheRealtor
