If you are interested in buying a foreclosure you have to understand that the rules of the game are far different than in a typical real estate transaction. This is equally important for people who want to buy a residence and for those who want to make an investment in rental property. Many investors aren’t fully aware of this and as a result, waste time, money and miss great opportunities. Here are the 5 most overlooked secrets in buying a foreclosed property that trip people up.
1. The Agent
The key to finding a great foreclosure is your agent. She has the contacts at banks that make these deals work. It’s critically important to select an agent who works exclusively with distressed properties like foreclosures and short sales.
Typically a bank will only work with a small number of agents to handle their inventory – maybe only one agent. Why work with anyone who isn’t on that list?
The banks love working with these agents because they know what they are doing in this specialized field. And you should love working with them because you’ll have an inside track to the bank if you do.
If you work with the bank’s broker, there will only be one agent to split the commission with. The bank saves money this way and therefore looks more favorably on buyers using these people.
Remember that these agents know about foreclosures before they hit the market. Make sure to ask your agent about upcoming properties that haven’t yet been listed. And keep in mind that you are going to have sell yourself to the agent if she is in high demand. If you are planning on flipping homes, tell the agent. She’ll be more interested in working with you if she sees potential for lots of business.
How do you find the best agent?
There are two ways to find the right Realtor. The easiest approach is to just call the bank. Ask to be connected with the REO (“Real Estate Owned”) department and then ask them for a list of agents who handle their foreclosures.
The second method is to search foreclosure databases*. Forget about the properties on the list. Look for agents with multiple listings. These are the people who have been anointed by the bank. And these are the Realtors you should be most interested in doing business with.
2. The Property
When you search for foreclosed properties you have fewer homes to choose from and a lot less time to make a decision to buy. If you are looking for the perfect home to live in at a killer price, you may have to look for a very long time. My advice is to be flexible with your requirements for the home itself.
You have added pressure because deals move really quickly and you have to be ready to act. That involves having your financing lined up.
If you are buying the house for cash, that’s no problem. But if you need financing for the property keep the following in mind:
a. The REO department doesn’t have any loan officers on staff. Don’t count on the bank that is selling you the property to also do the financing. Forget about owner carry-back financing in the foreclosure market.
b. You’ll need to have a preapproval letter from you bank before you even start. This letter will spell out how much the bank is willing to loan you. That letter is based on your income and credit score. That’s why it’s smart to check your credit score before you start this process. The last thing you want is to get a nasty surprise at the very last moment.
3. The Deal
Foreclosure transactions are vastly different as I said. First, don’t assume you’re going to get a killer deal on a property just because it’s a foreclosure. Find out what similar homes are selling for by asking your agent for a list of comparable transactions. Make your highest and best offer with the understanding that if the bank doesn’t accept your offer, you’ll have to move on to the next deal.
The only exception to this strategy is if the foreclosure has been listed for a while without many offers being tendered. In that case, you can try to haggle.
Before making your offer, understand that foreclosure properties are sold “as is”. Take advantage of this by taking a contractor with you when you inspect the property. This may cost you a bit up front but it is far cheaper than buying a home and then discovering a major problem that will be expensive to fix.
Buying foreclosed property can be very rewarding but it takes work, dedication and time. Have you dabbled in this market? Why or why not? What has been your experience with foreclosed properties?
*Realty Trac is one good database you can use to look for foreclosures.
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