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Buying a
Foreclosure Property Below Market Value: Five Tips from the
Pros
House hunting can be a very daunting experience, especially in
today’s real estate market. Both investors and home buyers
have been priced out of the market by escalating costs, and
good real estate deals are increasingly difficult to find.
But there are bargains out
there, for people who know where to look.
For people willing to do some homework, the foreclosure market
offers some of the best opportunities in real estate today.
With interest rates ticking up and ARMs adjusting upward,
experts predict an increase in the number of foreclosure
properties on the market. Foreclosure properties can be a
terrific investment, or give home buyers a much more
affordable option than traditional properties but they’re not
a way to get rich quick, and a foreclosure purchase needs to
be approached in an educated, intelligent manner.
Five tips to help you close a
deal on a foreclosure property:
1. Learn about the different types of foreclosure properties,
and the foreclosure process.
There are three basic types of foreclosure properties,
representing different stages in the foreclosure process:
notice-of-default (NOD) and notice of trustee sale (NTS),
which are both pre-foreclosure properties; and
real-estate-owned (REO), a foreclosure property which has been
re-purchased by the bank.
For most consumers, buying a pre-foreclosure property from a
private homeowner is the best option. It s important that both
the buyer and the seller see the situation as a win-win
situation, in order to ensure a smooth process. In this case,
the seller is able to get out from under a mortgage without
destroying their credit rating, the lender is saved the time
and expense of foreclosing on the property, and the buyer gets
a below-market price on a home.
Foreclosure auction sales are typically the domain of the
professional investor. These properties are formally in
default, and sold to the highest bidder at an auction. Buyers
are required to be physically present at the auction, and must
pay 100% of the sale price in cash, on the spot. Though
foreclosure auctions can offer significant savings, they are
not for the feint of heart or the uninformed. Unless the buyer
is already familiar with a particular property, there is
usually little time to examine it. And the buyer will be
competing against professional investors and sometimes even
the lender at the auction.
Once the lender officially reclaims a home, it becomes a
real-estate-owned property (REO). While REO properties
typically offer more time for evaluation and a more standard
bank-managed transaction, their prices are usually very close
to full retail market value.
2. Secure financing early
It s important for a buyer to be pre-qualified before engaging
in discussions with a seller. This ensures that the buyer is
in a financial position to purchase the property, and is in
the strongest possible position to negotiate. It s best to
work with a lender who understands the foreclosure process,
and can guide the buyer through certain steps, such as
ensuring that a property is FHA-compliant. Another reason to
consider pre-qualification is that not all lenders finance
foreclosure properties.
Having approved financing in-hand makes negotiations with both
the seller and the lender easier, and may even make it
possible for the buyer to simply cure the default and take
over the existing loan to reduce loan processing fees.
3. Engage a real estate agent as a buyer s representative Most
people hire a real estate agent to sell their home. These
seller’s representatives are charged with making the sale and
negotiating the best deal for their clients. Buyer’s
representatives have the home buyer s interests at heart, and
are charged with finding the right property and negotiating
the best price for their clients. Picking the right real
estate agent will make a buyer’s life much easier. There are
agents who specialize in the foreclosure market. Look for an
agent with foreclosure transaction experience, as well as
knowledge of local, regional and state laws. But it s also
important to consider the agent’s knowledge of the area; their
ability to close a deal; and their access to other
professionals (attorneys, lenders, mortgage and title
professionals) to ensure that the buyer is in good hands.
4. Do your homework
Stocks offer higher potential returns for investors than
traditional savings programs, but are also riskier. Similarly,
purchasing foreclosure properties is somewhat more risky than
buying traditional real estate properties, but offers much
higher potential savings. With the right examination and due
diligence, buyers can significantly reduce the risks. It makes
sense to give any property under consideration a thorough
examination. Here are eight steps for doing a
professional-level exam.
5. Make a realistic offer
Despite what you may see on late-night cable TV, investing in
foreclosure properties isn’t a sure fire get rich quick
formula. Lenders aren t likely to give properties away,
particularly in a real estate market where prices continue to
rise. And homeowners in financial distress may be difficult to
deal with, particularly early in the foreclosure process. The
keys to a successful foreclosure property purchase are
diligence and patience.
As a rule of thumb, the best savings can be made at the
pre-foreclosure stage, where home owners can avoid a
foreclosure and lenders can save the time and cost involved in
going through the process. Another critical point in the
process is immediately prior to the auction date, when all
parties might be most open to a last-minute solution. A real
estate who is savvy concerning foreclosures and market value
can usually come up with a realistic offer; one that offers
significant savings, while meeting the requirements of the
lender.
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