Tuesday, September 23, 2008

How To Buy a Foreclosed Home

I am often asked about the process we went through in buying our home -- a foreclosure.

First off, when my friends ask me, "So, how do we go about finding foreclosed homes too?" I tell them, "Run! No! Don't go looking for trouble!"

The truth is, the market is sinking. At least here in Michigan. Prices are dropping everywhere, not just on foreclosures. And, you don't need to go looking for foreclosures. We were not looking specifically for foreclosures, but in the area we were house hunting, 75% of the homes we looked at were either foreclosures or in short sale.

A short sale is when the bank tells you that you have to put your house on the market to keep it from foreclosure. It is similar to a foreclosure for the buyer as the bank is in control -- you deal with the bank not the family. For the family it's different from the foreclosure in that their credit is not as badly damaged. We once found ourselves in a terribly uncomfortable situation where the family was heated about not wanting to sell and here we were in their house -- with them across the street looking in at us. When we were done they had a screaming match with our real estate agent because we took an hour and a half instead of an hour to look at the house (we were planning to make an offer).

Before I share how to navigate a foreclosure sale let me say this, "Do NOT pay anyone to find foreclosed properties for you!" You don't need to go looking for them. They'll find you. And remember, in this market a lot of people are ready to price their house to sell. Translation: cheap. So, don't think that a property has to be in foreclosure to get a deal. If a house has been on the market a long time, you have the upper hand in negotiations.

We've found that foreclosed homes come in two varieties. The first is the family who doesn't give a hoot. They don't care about their property and they don't care about their credit. They milk the system for all they can. You'll know their homes -- they're falling apart and not worth a second look. The other scenario is the family who loved their home and took good care of it, but simply fell on hard times. Sometimes their money trouble started because they kept refinancing the house to fix it up. Those homes are the ones you'll be interested in. It's very sad, and I admit feeling guilt walking through foreclosed homes, but there isn't anything you can do. In fact, you may be helping the family by getting their house sold and taking good care of it.

Note that foreclosures are not always a deal. An important thing to remember is that they are almost always "AS IS." There is little to no negotiating once an offer has been accepted. For this reason, as we were later told by one of the bank's employees, you should consider paying for the inspection before placing a bid on the house. Then, when you go to put in your bid, you can include a letter explaining all the serious issues you found and why you offered far less than the asking price. Now you are in a negotiating position.

When dealing with human beings (as opposed to a corporation, i.e. a bank) you would have an inspection and then negotiate should any serious problems pop up. When dealing with a bank, they consider the inspection "for your information only." If you find something seriously wrong in inspection and therefore want to lower your offer, 99% of the time you will need to pull your offer and start all over again with a new offer.

That brings up another problem with dealing with banks. It can take months to get a response to an offer. Months. Three to six months is not unheard of. Though three to six weeks was our experience.

Ask your agent to help you negotiate extras up front. For example, you may want to ask for a one-year home warranty insurance policy on the appliances, etc. With foreclosures you have no history on the house. There are no disclosures because the person who lived in the house is not involved. The bank didn't live in the house so they don't know if the basement leaks after a hard rain or that the stove is on its last leg. The real estate agent should be able to suggest several other negotiable items up front.

Don't be afraid to underbid on a house. Unless you are in a desperate situation and have to find a house today, you are in the driver seat. The worst they can do is say, "No." There are plenty of houses out there. Rob and I put bids on multiple houses and were turned down. But that was a good thing because God was saving a special house just for us. We found the perfect house and got it for 40% less than it sold for four years ago.

What happened was that it was a foreclosure and had sat vacant for two years. There were some big ticket items to be fixed -- the roof and windows -- so it wasn't moving. But the basic construction is rock solid and the property gorgeous. In the end, it was a very good move on our part.

But it wasn't easy. There was some water damage done AFTER our bid had been accepted (the bank's agents didn't winterize it correctly) and we tried to re-negotiate the price. Remember what I said about banks not negotiating. Well, Flagstar bank told us, "No deal. It's 'as is' and that's that." We made the decision to pull the offer. In the end, they negotiated -- just an hour and a half before the scheduled closing! I never want to go through that again.

Then when closing time came, the bank's employee was no where to be found. There was a snafu that could have halted the deal and no one could find the guy. We ended up going forward with the deal, but it cost us an extra $1,000 in property tax. You see the bank employee told us that we would not have to pay the pro-rated property taxes. He was very clear on the phone that the taxes were paid through the summer and that was one thing we didn't have to worry about. That was an important lesson learned -- Get everything in writing!

In summary:
Don't pay someone to find foreclosures for you.
Foreclosures are not the only deals out there.
Foreclosures are "As Is."
Get everything in writing.
Negotiate up front for extras
Consider having the inspection before placing a bid.
Be prepared to wait -- banks don't work quickly.
Don't be a afraid to underbid -- you can always negotiate or move on to the next house.
Pray! Ask God to help you find just the right house.

1 comment:

Renee said...

The very first house I looked at in AL was a foreclosure. One of the laws here is that even after closing, the previous owners have one full year to come up with the cash to buy back their home. Yes, you can be forced out of a home you purchased if the foreclosed owner wins the lottery or finds a pot of gold. While that is unlikely, it was enough to keep me from looking at any more foreclosures (I'm not a risk taker)