Despite increases in home prices and a stabilizing housing market, many experts say the foreclosure crisis is far from over.
But buying a foreclosed home is different from buying a typical resale. In many cases:
- Only one real estate agent is involved.
- The seller wants a preapproval letter from a lender before accepting an offer.
- There is little, if any, room for negotiation.
- The home comes as-is, and it’s up to the buyer to pay for repairs.
On the upside, most bank-owned homes are vacant, which can speed up the process of moving in.
“Buying a foreclosure is definitely a bit of a grind. It’s not easy,” said Robert Jensen, broker and president of the Rob Jensen Co. in Las Vegas. “You’re getting fantastic pricing, but sometimes it takes going through a lot of houses and writing a lot of offers to get the home you want.”
Get a Realty Broker and a Lender
The first two steps in buying a foreclosure should happen almost simultaneously: Find a real estate broker who works directly with banks that own foreclosed homes and get a preapproval from a lender.
Elaine Zimmerman, a real estate investor and author, recommends that shoppers first visit any site with a database of foreclosed homes.
You also could look at a local real estate website that lets you filter the results to see only foreclosures.
You might find the acronym REO, which means “real estate owned” (by a bank, that is). This signifies that a home has been through foreclosure and the lender is selling it.
Get a Broker on Your Side
The goal of combing through foreclosure listings is not to find a house; it’s to find an agent.
Banks usually hire a few real estate brokers to handle their REO properties in a market.
In a lot of cases, the buyer works directly with the bank’s broker instead of using a buyer’s agent. That way, the commission doesn’t have to be split between two brokers.
“A lot of these realtors have a long-term relationship with these banks, and they know of listings that haven’t even come on the list yet,” Zimmerman said. “Call them about the listings that you’re interested in, but also ask them about listings that may be coming up because sometimes it may take a day or two or even a week before a listing actually comes onto the database.”
In places where thousands of foreclosed properties are for sale, you might not get much one-on-one attention from overloaded agents.
To prove that you’re serious about buying, said Jensen, “right before or after you meet with the agent, meet with the lender.”
Get a Preapproval Letter
Unless you plan to pay cash, you’ll need a recent preapproval letter from a lender.
The letter will describe how much money you can borrow, based upon the lender’s assessment of your credit score and income.
“The problem is, buyers want to find the house first, and then they think they’ll work out the financing,” Jensen said. “But the problem is, the really good deals on these bank-owned, they go quick — and the buyer doesn’t necessarily have time to try to work out the financing afterward. They need to work that out first.”
Zimmerman said some first-time buyers make the mistake of assuming that the bank selling the home will also finance the mortgage as part of the deal.
“Don’t expect to get financing from the bank that foreclosed on it,” she said. “That’s a totally separate transaction, and they view it that way. The people in the (bank’s) REO department are not loan officers. They are getting rid of bad assets.”
Pricing Depends on Sales Pace
There’s no rule of thumb on what the bank’s bottom line is on price.
Just as with any other real-estate purchase, you have to look at the recent sales prices of comparable properties, or “comps.”
Jensen said: “You really have to look at the comps in today’s current market conditions and write a competitive offer based on that. Sometimes the bank prices the homes really low, and the home will have multiple offers over list price within hours. Sometimes it’s priced too high, and you can come in lower. A lot of times, buyers will come to me and say, ‘We want to write offers for half price.’ It just doesn’t work that way.”
Don’t Expect a Repair Discount
Keep in mind that foreclosed houses generally are sold as-is. Jensen said: “Let’s say the house is listed for $200,000, all the comps are $200,000, and so the client comes in and said, ‘Hey, look, I want to buy this house but I’ve got to do paint, carpet and fix some mold damage, so I want to take $15,000 off the price.’ You know what? All the other ones were in the same condition, and they sold for $200,000.”
Jensen further counsels to look at the “absorption rate for your product class.”
That means you should find out how quickly comparable houses are selling.
In foreclosure, a 3,500-square-foot house with a pool in a gated community might sell within days or hours, whereas more modest homes might sit on the market for weeks.
If homes in your product class are selling swiftly, “the best advice on a bank-owned property is to come in at your highest and best, unless the property has been sitting on the market forever with no activity,” Jensen said. “If you’re going to be upset because you would have gone $5,000 more, but you lost the property, just bid the higher price in the first place.”
Jensen and Zimmerman recommend getting to know tradespeople who can assess and repair damage from pests, mold and leaks.