Q. I keep hearing about all these foreclosures, and how they are great deals. What should I know about buying a foreclosure?
A. There has been a lot of information written on purchasing foreclosures and on the steps to buying a foreclosure. I’d like to speak about one aspect of foreclosure purchase that isn’t often addressed: Should you even buy a foreclosure?
You can buy foreclosures for as much as 30% or 40% below market, but most foreclosures sell for less than 5% below market. That small savings may be offset by other factors in the transaction.
Price-conscious home buyers are lured by the low prices advertised for properties in foreclosure. They hope to show up at the auction and win the lowest bid. Before you rush forward to buy a foreclosure, stop to think about some of the drawbacks and repercussions of a foreclosure sale.
For most consumers, purchasing through the foreclosure process can prove daunting. Good buys are available, but they require research, preparation, patience and persistence. And retail sales are priced using the very same comparable sales, so their price is often comparable.
The foreclosure process starts when a property owner falls behind on mortgage payments. Many owners of homes that go into foreclosure have been struggling financially for almost a year before they give up, which usually means that the house has not received needed repairs or general maintenance for a while.
This may run the entire spectrum of issues, from missing light bulbs to roof leaks. Trash in front yards, dead landscaping, broken appliances and windows, and dirty carpets, floors and walls are found in properties even in very affluent areas. Homeowners who are angry about losing their house have been known to remove fixtures, cabinets, appliances, even the tub or toilets. Walls may be broken, and pipes for the plumbing removed.
Houses in poor condition might fetch bargain prices, but repairs can boost the cost again. Any savings in price is eaten up by cash that must be put into the property to make it habitable. If this is a first home for you, and you are living on a tight budget, your purchase may leave you no money afterwards for major repairs or upgrades. In that case, a “retail” purchase (one where the owner is the seller, as opposed to a bank) is a much better solution for you.
The first rule of real estate, (“location, location, location,”) applies here. If there is trash in every room of the house, but the property is in a good area with high resale values, hold your nose, walk through the entire house and consider making a low offer.
Be sure you know who is living in the property. If the property is occupied, the successful bidder is typically responsible for removing the occupants, who may not be the previous owners. They could be relatives or friends of the owners, renters or squatters. These tenants have rights. Be sure you are aware of all local ordinances that may apply, because you might have to evict them. If you are unfamiliar with eviction processes, you should hire a lawyer to handle it for you.
Because these homes are purchased “as is” from the lender or HUD, there is no guarantee of condition, and properties are often sold “as-is”, with no warranties. Sometimes it is possible to inspect these homes prior to making an offer, but sometimes access is not granted.
If the property is in poor enough condition, it will not be eligible for many loan programs that would otherwise be attractive to a first time home buyer, including FHA. Some foreclosures are advertised as “cash only” purchases for this very reason; no lender will make a loan on the property.
Buying foreclosures is not for the faint of heart. It’s best handled by savvy investors and is not recommended for first-time homebuyers. This information is not meant to scare you, it is meant to prepare you for the reality of the foreclosure market.
If you still feel a foreclosure is for you, I would urge you to do the following:
1. Speak with a mortgage broker who is knowledgeable about lending on foreclosures. Get pre-qualified with several different loans you could use, depending on the overall property condition.
2. Hire a great Realtor as your exclusive buyer’s agent. Have them run a property profile on each property you are interested in, as well as a complete market analysis. Be sure that the “bargain” you are buying is really a bargain.
3. Speak with a home inspector and a contractor, so you are sure you know the condition of the property and the true cost of repairs.
4. If you can’t see the home, don’t buy it. If it’s not a bargain, pass it up.
5. And please, remember to look at those retail sales. In the long run, it may be a simpler, happier way to go for a first time home-buyer.
Would you like to speak more about this? Please feel free to call or email me. Regardless, congratulations on purchasing your fist home. And don’t forget to take advantage of the $8000 home-buyer tax credit! Best of luck.
Q. Explain the new tax credit signed last week.
A. As I’m sure you all know, we have a new home-buyer tax credit, and some reason for optimism. Simply stated, here’s what the bill means:
- First-time home-buyers are eligible for up to $8,000 on the tax credit, which is the same as the current credit. As long as you stay in your home for 36 months after the date of purchase, the credit does not have to be repaid.
- There is a new credit of up to $6,500 for homeowners who have lived in their homes for at least five consecutive years. That provision starts on Dec. 1, 2009.
- To qualify, buyers in both groups have to sign a purchase agreement by April 30, 2010, and close by June 30, 2010.
- The new tax credit applies to home-buyers with incomes up to $125,000 (up from $75,000) for single filers and $225,000 (up from $150,000) for joint filers. Also, buyers must be 18 years of age or older. To help guard against fraud, buyers are required to attach documentation of purchase to their tax return. Consult your tax professionals for details on this.
- The tax credit is available for the purchase of principal homes costing $800,000 or less. Vacation homes are ineligible.
- These credits would be extended an additional year, until June 30, 2011, for members of the military serving outside the United States for at least 90 days.
- At the present time, lawmakers are saying that this is the last extension of the credit.