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Buying a Foreclosure House

In adversity there is opportunity. As some borrowers find themselves overextended, hit by bad luck, or out of work, they are walking away from their homes and leaving their lender to deal with the property. A careful buyer can profit from these bank owned assets. Thanks to an abundance of these properties, and information sharing, these properties can be easy to find.

REO (Real Estate Owned) is the term used to describe a property that is owned by a lender. Typically, a homeowner in default loses his property in a foreclosure sale, where the lender (bank) will bid the amount of the loan at a public auction. The bank takes legal possession of the property, and prepares to sell it. In our area, there are REO houses in every price range and every condition- from “tear down” to brand new.

Before a foreclosure is placed on the market, several things will happen. In most cases, the lender will work with a Real Estate Broker that handles the REOs in a particular market. That Broker is contacted, and instructed to prepare the property for sale. The Broker’s preparation includes:

• Check for occupancy. It’s not unusual to find someone living in the foreclosed house. Though the bank has ownership, it may require an eviction to convince the occupant to move. Rental properties are subject to tenant rights, and the tenant may have a valid lease.
• Trashout and cleaning. The property will need to be cleared of personal property and trash.
• BPO- Broker Price Opinion. The listing agent and one or more other agents give an opinion of the market value of the property, including scenarios for improvement and varying market times.
• Utilities, lock changes, liens, title issues, neighborhood association dues, all have to be dealt with before the property is listed.

After this preparation is done, the property is listed for sale.

Most asked questions:

Q: If I make an offer on a property, how soon will I have an answer?

A: It depends. Some banks will respond the next business day, and there is little chance you’ll get a response on a weekend. Plan on at least 7 days before you’ll know if the offer is accepted.

Q: Can I get a better price on foreclosed property?

A: Maybe. If a property needs repairs, and is to be sold “as is”, a discounted price may take into account the unknown conditions and cost of repairs. Your agent should be able to provide you with comparable sales information. The lender has no interest in keeping the property, and the price should be reduced periodically until it is sold.

Q: How long does it take to close?

A: Bank owned properties are not much different when it comes to closing. Once the offer is accepted, expect about 6 weeks to close, if there is “clear title”.

Q: Can I have an inspection done?

A: Yes. A purchase agreement should include a contingency for satisfactory inspection.

Q: Is there a warranty?

A: Maybe. Some sellers provide a warranty, if you just ask for it. A homeowner’s warranty can be written into the purchase agreement.

Q: Are there special purchase agreements for foreclosure properties?

A: Sometimes. Ask your agent for a preview of the “standard counter offer”, or the lender’s version of the purchase offer before submitting your offer. If title insurance is provided by the seller, ask to preview this also. You will be required to provide loan prequalification or proof of funds before an offer may be accepted.

More questions? Call your agent, or call Lloyd Freyer at (402) 677-0017.

Tagged Under : Buying Houses, Choosing an agent, Real Estate Owned (REO)

Refer to previous posts for steps 1-4

The fixer house- making the offer. Where is the money made in real estate? In the renovation, in the marketing, in the sale of the property? These things are all important, these things are all a little beyond your control, the one thing you can control is the purchase price. When you are making an offer- and other agents may not want to hear this- you might have to stir things up a bit. If you have the time, and there are not competing offers, don’t be afraid to hold out for a few hundred dollars. You know what the property is worth, you know what your profit will be, you can calculate what a few extra hours of negotiation will bring. A $500 price reduction for 5 hours of work is pretty good pay for most of us. This is real money in your pocket when it’s time to sell.

One strategy is to ask for a dozen things from the seller. Only one of these things may be important to you. The seller will reject the offer, but seeds of doubt are planted. You then make a similar offer without those contingencies, but leave in the important item, such as the price or closing date. You have “softened up” the seller, and they may be more willing to look at the offer.

Once you have an agreed on price, don’t beat on the deal, you’ll want the seller and the agents working with you.  If your purchase is contingent on inspections, be clear about what will make or break the deal. A purchase agreement should allow for a buyer to back out in case of “substantial defects”. Define your “substantial defect”- is it a safety issue that makes a house uninhabitable, or an issue that will cost more than, say, $500 to repair. The seller may be unaware of a substantial defect such as a chimney obstruction, and may be willing to repair it.

Tagged Under : Buying Houses, home remodeling

Refer to previous posts for Steps 1,2, 3

Step 4 is go shopping- find the right house. Ideally, you’ll find something in an area that has seen steady appreciation. Look for the “dog” of the block- a home that you can buy for less than the neighborhood average price. Your real estate agent can provide you with a Comparative Market Analysis- a snapshot view of what’s for sale and what’s sold in the area.

Be aware of the seller situation- most fixer properties got that way because someone would not or could not maintain things properly. If everything you can see is in bad condition, you can be sure that the less visible items have not been taken care of either. Things that ultimately cause people to leave their house are items that they can’t afford to repair- the roof, the furnace, the structure. Assume the worst, budget for the roof, the furnace replacement, the garage floor, the obvious needs. If you’ve done your homework, you can prepare a budget, a timeline, a projected profit. You might have time for contractor bids, but you probably won’t. If a fixer property is a viable project, there will be others waiting to make an offer, you won’t have days to make up your mind if you want to make the offer. You do have an option of getting a home inspection done, this can buy you a few days to get the pricing for the improvements needed. If the house needs too much work, you have spent the inspection fees, but you’re not stuck with a loser project.

Next: The purchase negotiations.

Contract or do it yourself?

If you can do it all, great! It’s harder to profit if you have to hire someone to do the little jobs. If you can afford to hire it all done, mind the details. Most of us work on a combination- Some like to do the technical stuff- electrical, plumbing, locks, hardware, trim wood work, cabinets. Some would  hire the heavy work- concrete, roofing, carpet laying, large drywall jobs. Painting seems to be a love it or hate it proposition, if you don’t mind painting, it can be gratifying at the end of the day to see what has been accomplished. There are plenty of painting contractors out there, it’s a low overhead business with few barriers to entry. If your house was built before 1978, it may (likely) have lead based paint. Understand the risks and EPA guidelines for lead paint handling. There are strict new rules that take effect April 22, 2010 and fines of thousands of dollars per violation, per day.

Important:  Be sure that any contractor you hire is properly insured and is covered by worker’s compensation insurance. If someone is hurt on your property and is uninsured, you may be liable for ongoing worker’s compensation payments.

Refer to previous posts for Step 1 and Step 2

Step 3: Check your attitude

You’ve heard the expression “Get ‘er done” – I think it comes from Larry the Cable Guy. This “get ‘er done” attitude is what it takes- keep plowing ahead, know your budget, don’t underdo or overdo it.

How good does it have to be? Look at comparably priced new construction, the quality of paint, floor covering, hardware. Your fixer house has to look great for about 30 minutes- that’s about how long the buyers will spend looking before making up their mind to buy.  If a proposed improvement won’t pay for itself or make a dramatic visual impact, you should probably leave it out. Don’t try cut too many corners, the appraiser and home inspector will be the ultimate judge of the safety, functionality, and value of the home. Again, call on your real estate agent for advice on what it takes to sell the home.

You might be surprised at the energy you’ll find if you haven’t worked on your own before. Long days at a job can seem interminable, a long day on your own project should finish with ”admiration time”- a look at what was accomplished for the day.

Refer to a previous post for Step 1- Assess your personal capabilities.

Step 2: Check your assets. You’ll need to budget, based on a theoretical purchase. Here’s one way to look at it: A house that you purchase for $100,000 as is should be worth $150,000 complete. (Your real estate agent can help determine if these are realistic figures). A lender will want about 25% down if you are borrowing for the purchase. Work with your lender so you are prequalified for the purchase, you want to be ready to write an offer that will be accepted.

 You’ll also have closing costs and prepaid taxes and insurance- again, your agent will help estimate these costs. If it looks like 3 months of work to be done, figure 6 months worth of carrying costs- always leave room for contingencies and worst case scenarios. If the house does not sell in a reasonable time frame, be prepared for a fall back position of either renting the property, or selling at a reduced price. If this is your first renovation, don’t plan on making a living at this, plan on using all your spare time for a few months to get this done.

 Then there’s the cost of the renovation itself. Check your bookstore for a repair and remodeling estimator resource, talk to local contractors for “ballpark” figures for various jobs. Your real estate agent may have a referral database of contractors that are available.

This might seem like a lot of work and preparation, but the risks and rewards don’t allow for shortcuts.

Next: Step 3: Check your Attitude

As a veteran of the fixer- flipper- renovator business, I often hear “I’ve always wanted to do that- buy a house, fix it and resell it”. Just as often I hear “I did that once, never again, I thought I‘d never finish/get my money back out”. Like anything else, it helps to plan ahead. Know what you’re in for, maybe work for another owner first, read up on how this is done.

Before you look for a fixer house, make sure you’re ready to buy, ready to follow through.

Step 1 is assess your personal capabilities. If you are working in a construction trade, you have a head start. Whether your specialty is roofing, drywall, plumbing, or painting, you should have a good idea of what it takes to complete a job. Talk to your fellow tradesman, they may be willing to “swap work”- they’ll hang a garage door, you’ll install a furnace for them. Keep in mind that permits and inspections may be required, not only when the work is being performed, but also at sale time when buyers, lenders, and appraisers want to see proof of work being done properly. If you’re not handy, be prepared to pay in other ways- you’ll have to hire more things done, you’ll have to spend more time researching costs and materials, you’ll have to negotiate harder to get the job done at a good price.

If you are able to do the renovation full time, treat it just as you would any other job. Yes, you have to set your alarm, be up and out of the house on time, plan on lunch and coffee breaks. It’s great to have the freedom to do what we want when we want to, the truth is that most of us don’t have the driving force to complete a project on time and on budget unless there’s a boss involved.

You’ll probably find more people who are willing to talk you out of this venture than those who would encourage you. Find those who have completed something like this successfully, and find out how they managed the process. It’s not rocket science, but it does take planning.

Should I invest in rental properties? House, duplex, or apartment?

There are plenty of real estate investment opportunities in the greater Omaha area. As Will Rogers said: “Buy land, they ain’t making any more of it.” Income producing property can be a path to security, tax savings, and wealth building. It can also be a source of sleepless nights, a drain on cash reserves, and an opportunity to learn all kinds of things you didn’t want to know about.

There are 4 basic choices of direct real estate investment: 1) bare ground 2) multi family dwellings 3) commercial property and 4) single family houses. After having some experience with all 4 types of investment, I have found that the typical buyer is most comfortable with the single family rental house as an investment. Let’s look at what’s involved when you invest in a rental house.

Any rental investment needs to be treated as a small business for its owner. There is an inventory to keep up, a storefront to maintain (curb appeal), marketing, bookkeeping, and customer relations. It can sound complicated, or you can refer to what you already know about real estate.

A long term look at the investment includes selling the asset. The single family dwelling can be used by anyone, the “target market” of buyers is unlimited. A duplex, fourplex, or apartment complex is not a purchase that everyone contemplates, thus the market is restricted. Any real estate is an illiquid asset, it cannot be moved, and sometimes is difficult to finance. There are systems available for purchase of single homes, our government is continually finding ways to help individuals purchase their own homes. Commercial and multifamily properties commonly require a 25% to 40% down payment, a “barrier to entry” is the large amount of cash required to get started.

Tagged Under : real estate investments