Navigating a Foreclosure Purchase
Buying a foreclosed property may be a great way of getting a property that is well priced, but it can be a lot more difficult than buying from an individual seller. Foreclosed properties may be rundown and have deferred maintenance issues, and in some cases, many have been deliberately damaged by the owners who were foreclosed upon. When buying a foreclosed property, you are almost always buying “as is, where is” with little room for negotiation.
Foreclosure adds a layer of complexity and a new player to your purchase: the institutional seller. Foreclosed properties are generally owned by banks, but most banks higher outside companies to manage and sell the properties, adding yet another player to the mix. Some of these outside management companies are very good at what they do and help the process. Others, unfortunately, make everything harder.
Here are my 5 practical tips on how to find and buy foreclosed houses:
1) Find a realtor that specializes in REO.
Bank owned properties are usually called REO, meaning “Real Estate Owned.” Most institutional sellers hire one or a few agents within a market to sell all of their properties. Accordingly, only a handful of realtors in a geographic area are REO specialists and will have access to the best properties. Find this specialty realtor by looking on Zillow.com, or other websites where you can isolate REO properties for sale. You are not necessarily looking for a property by doing this, you are looking for a realtor whose name appears frequently on the foreclosure listings, and particularly in the neighborhood in which you are searching. Once you identify a few, call them and tell them what you are looking for. Most will be happy to work with you, as the sooner they have a buyer, the sooner they get paid.
2) Get pre-approved by a lender.
Unless you have enough cash to buy a property without a mortgage, you need to be pre-approved for a loan by a lender. Rehab Financial Group, LP and some other rehab lenders, will give you a pre-approval letter which says to the seller that they are financially qualified to buy the property, and the only outstanding issue is the value of the property itself. This pre-approval letter, often called a Proof of Funds letter, will help you get an offer accepted when you find one that you want to buy. These properties sell quickly, so don’t naively think that you can wait to apply for a loan once you find the property, because by the time you apply to a lender and get the Proof of Funds letter, the seller will have accepted another offer with someone who is more prepared than you were or has better credit history. Even a few hours makes a difference in these instances.
3) Be prepared to give the process time.
When buying from an individual seller, you will generally hear back from the seller within a day or so after making an offer on a property. Negotiations may be fast and furious for a few days, but are usually resolved quickly. Not so with an institutional seller. These sellers will likely suffer from the bureaucracy common in any large company, and responses can take weeks. Sometimes delayed answers are a bad sign, but sometimes it’s just laziness. Be patient, an answer will come, but almost certainly not in the time frame you would expect.
4) Consider investing in legal counsel before you sign.
Know what you are getting into. Many institutional sellers have their own contracts of sale that they will require you to use. These contracts are very good at protecting the seller from any claims you may have in the future, due to issues with the property, but do very little to protect you. Make sure to read and understand the entire contract and any addendum. If there are terms you do not understand, ask a lawyer. A few hundred dollars spent with an attorney can save you from a mistake that could cost you thousands.
5) Hire your own title company.
Many institutional sellers will give you a discount if you use their title company to manage the closing. This is especially true in states where attorneys do not handle the loan closings. It has been Rehab Financial Group’s experience that using the title company recommended by the seller is almost always a mistake. They are compensated by the seller and do not have the buyer’s best interest at heart. Frequently, they are large, off-site call desk locations, where each minute detail is handled by different individuals. Files get lost, issues are not resolved and loans take extensive time to close, if they close at all. By hiring your own title company to handle the closing, you are insuring that you are well represented and the closing process will be much smoother. It may cost a little more, but it is well worth it.
For more information on finding andchoosing between potential investment properties, head over to Chapter 2 of Rehab Financial’sFlipping Houses 101, where you’ll find information on finding houses and our guide for how to choose a house to flip.