Want to Buy a Foreclosure? Read this First.
Categories: Chattanooga Real Estate Investing, Chattanooga Real Estate News, For Home Buyers
By Kacey Sides, Buyer’s Specialist - Andy Hodes & The Scenic City Team
Foreclosures are everywhere. Here in Chattanooga, we definitely have our fair share. Buying a foreclosure can be a great investment or a huge nightmare. Having a Realtor on your side to guide you through the process can help keep you from a major, personal disaster. Keep in mind every foreclosure sale can be a little different, so being on top of your game will help give you the edge over your competition. Whether you are buying one to flip, or buying one to fix up and live in, keep one thing in mind - the good deals go fast, so you need to be prepared to move quickly when the RIGHT deal comes along!
The homes that are priced significantly below market value are going to get a lot of interest from other buyers and most likely sell quickly. Banks that own these properties are aware of this, and will typically wait to receive multiple offers from buyers before they make a decision to select the best offer. After receiving multiple offers, some banks will ask each buyer for their “highest and best” offer. You will then have a chance, possibly your last chance, to submit your very best offer, keeping in mind that your competition is doing the same thing. Conversely, some banks will wait for multiple offers, but then won’t call for highest and best. Keep this in mind when writing your initial offer!
Regardless of the situation, you want your offer to stand out. Keep these steps in mind when prepariing your offer to purchase:
1. Keep your inspection period short. I wouldn’t advise skipping a good home inspection, but having more than 7 days to inspect the property can adversely affect your offer; banks are looking for buyers that will move quickly. Many times, the bank will require any inspections to be done prior to making the offer so that contingency is removed from the contract up front.
2. Don’t ask for repairs. Most banks won’t do them. Just make sure you reflect potential repairs in the price you offer.
3. Go with Conventional financing, or better yet, cash! Have your pre-approval letter, if you are getting a loan, or proof of funds letter, if you are paying cash, ready to submit with the offer. (Some banks will not accept any offers without them.) FHA or VA financing can complicate the offer due to the type of inspections and repairs required by government-back loans.
4. Close quickly and make sure it is a time frame that you can stick to. If not, depending on their requirements, banks will charge you for every day past the set closing date until you close!
5. Price. This is ultimately what the seller (i.e. the bank) is looking to maximize. Make and offer that you are comfortable walking from if you don’t get the home, or a price you’d be comfortable with should your offer be accepted.
6. Seek representation. The listing agent represents the seller. Find a Realtor that can represent YOUR interests, understands the process and will advocate YOUR position in the negotiations. Typically there is no cost to the buyer for your agent’s service and representation.
Every bank is different, but they all will have addendums that you are required to sign that override the terms of the Purchase and Sale Agreement you submitted. Read them carefully as these addendums can drastically affect how you are required to purchase the home. The addendums will typically release the bank from all liability on the property and require that you accept the home in “AS IS” condition. The addendums will typically change your inspection period, and can sometimes change the date you close so be careful.
Working with a Realtor who is familiar with the ins and outs of working with foreclosures can educate you on the process and can prepare you for the unexpected. Have your Realtor set you up on an instant notification system for foreclosures that meet your criteria. That way you are one of the first to know when the deal of the day comes your way. Your Realtor can pull the comparable sales for the area to better educate you on how well the home is priced for the area; then you may need to make an adjustment for the home’s condition. Knowing how much work it needs, and what it will cost to bring the home back to excellent condition is a key part in making the decision on how much to offer. Keep in mind that every neighborhood has a price ceiling. Over or under improving for the neighborhood will only end up costing you money!
Foreclosures can be a great opportunity or your biggest nightmare. Proceed with caution after obtaining expert assistance from a Realtor, well-informed and experienced in handling foreclosures. You’ll be glad you did!
This entry was posted on Monday, April 21st, 2008 at 7:31 am and is filed under Chattanooga Real Estate Investing, Chattanooga Real Estate News, For Home Buyers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
This is terrific information, and I think your item number 6 is the most important. Seek your own representation - these transactions can be complex and are different from state to state. Having an advocate is vital!
Not just tips, but necessary steps to finalizing a foreclosure sale. Thanks!
I really like the classy design and functionality of your site, as well as the thoughtful content. So many new and under-informed buyers want you to find them a foreclosure (where they can make a $50,000 profit without doing anything … yeah, right… if I find them, why wouldn’t I buy them myself?), but they really don’t understand the dynamics of the short sale and REO deals. This article very thoroughly explains it.
I am curious about the inspection clause you mention and to have a home inspection up front. If there are material defects found or something wrong the major systems and conditions of the property, will the bank repair as a Seller would be obligated to?
Also, is the buyer in a foreclosure entitled to a final walk-thru and do they have any recourse if they find something wrong?
Hi Rebecca (and everyone else who’s interested) - with a foreclosure it’s essential to read the terms of the “Foreclosure Rider” or the “Foreclosure Addendum” required by the Seller/Bank. The terms in these documents supercede anything in your normal contract. Some banks require inspections done up front while others provide a 7 or 10 day time frame for the buyer to inspect and opt out. If the inspection reveals material defects some times the bank will either repair them or offer a lower price or other concessions to the buyer. They have learned that once a problem is identified that the bank either has to disclose it (even if they are exempt from completing a disclsoure) or repair it. They’d rather keep their current buyer on target for closing than start all over in a market where supply exceeds demand. So when a buyer finds a big problem they should reopen negotiations or just walk away. Here in Chattanooga, in our experience, that is not always the case. The addendum typically states that you are excepting the property as is, so unless there is major defects in the property that would be unforseen by an initial walk through, like structural issues etc. your offer should reflect what you feel it will take to restore the home. Most of the time, the bank will have it priced to reflect the need for repairs, but that is not always the case. Have your Realtor give you the comparables in the area to determine the equity in the home. That way, when your offer is accepted, if the addendums state that they aren’t willing to do any repairs, you are covered! Most addendums allow for a final walk thru to verify that the home is in the same condition it was at the time the contract for sale was accepted, but again be sure to read the addendum or rider carefully. I hope that helps. Thank you for reading our blog. Andy
[…] good read on this topic is a post from Kacey Sides and Andy Hodes, “Want to Buy a Foreclosure? Read this First.” I recommend this read to anyone interested in purchasing a foreclosure property. As an avid reader […]