Where to Buy Foreclosed Houses: Sales, Negotiations, REO’s

foreclosed

Any serious real estate investor knows that there is big money in foreclosure houses- homes that have been foreclosed by the bank or the government due to the owner’s non-payment of either mortgage loans or taxes. Foreclosed homes can sell for a fraction of their market value as banks rush sales to earn back even a portion of their losses, making them prime real estate for investors and entrepreneurs who aren’t afraid of risk. The following is a guest post from Avky Inc co-founder and Phoenix native Kyle Uchitel.

When it comes to finding foreclosure homes for sale, it’s important to go into the transaction informed and prepared to do business – and that means knowing the options and what homeowners or banks might be willing to accept as an offer. There are several ways to buy a foreclosure house, including negotiating with the homeowner or purchasing at an auction or trustee’s sale.

Buying Directly from the Owner Before Foreclosure is Final

Inexperienced investors might think that banks would be eager to take possession of foreclosed homes quickly and make a sale, but banks and the government get tied up in lots of paperwork and red tape in the course of foreclosing on a house. In many states, as well, there are specific regulations about how long a homeowner must be allowed to provide the funds to keep their home – anywhere from four months to a year.

In the course of foreclosure, it’s possible for the homeowner to repay the bank loan (or pay back taxes to the government), including interest and other charges, and be allowed to keep the house.

During this period, it’s possible for a savvy real estate investor to negotiate a deal with the homeowner to purchase the home – saving the owner from the black mark of foreclosure on their credit rating, and allowing the buyer to purchase the house at a bargain price. Investors who their research and know the laws can score a terrific house at a fraction of market price.

Trustee’s Sale or Foreclosed Property Auction

Even more well known is the foreclosed property auction or trustee’s sale. This option is both riskier, because a buyer won’t be able to see inside the home before he or she buys, but less guilt-ridden since it makes it possible to avoid any dealings with the former homeowners. Again, the most important thing is to come prepared, do the research, and know the market for the area.

Bank-Owned or REO

The third, and least-common, type of foreclosed property are those that are not sold at auctions. These properties become “real estate owned” or REO homes and are usually fixed up by the bank before being sold through the usual route of real estate agents and house showings, or they may be offered up at auction again. These are usually not worth looking for because they aren’t likely to sell at much of a bargain.

There are some amazing bargains to be had in the foreclosure homes market. Whether a buyer is looking for a home for his- or herself or an investment property, foreclosure houses are the way to save – for those who know how to do the research and avoid the pitfalls of the marketplace.

Kyle Uchitel is a chemical engineer and co-founder of Avky Inc. He can be reached best on Twitter at @kyleuchitel.

Quality Workmanship: A Preparation Requirement

quality workmanship

The following is a guest post from real estate economist and expert Alex Vasser, based out of Manhattan.

About Quality Workmanship

When Fixing Up To Sell–Quality Workmanship Matters! Some many people ask me what needs to be done to get a home ready to sell. Obviously cleaning and de-cluttering are priorities…but some times a little more is necessary to enhance you profit possibilities.

Instead of focusing on how to clean and fix-up your home–I think I will tell you about what NOT to do…read on…and learn something from this story–it could save your pocketbook.

We’ve all heard the saying that goes: “If it’s not worth doing right, it’s not worth doing”.

This weekend my sister and I went to a For Sale By Owner-Open House. You see, I looked at this house a few months ago when the original owner’s family was selling it…a cute house that was in bad need of renovation. I suspect they bought it in the mid to upper twenty-thousand range. It is located in a sleepy-little town where older homes are often bought and renovated.

For weeks I had noticed that the windows and siding on the outside of the house were not level. Your eye is immediately drawn to it. I was astonished even more as I walked up… Look at some of the things I noticed in regards to quality workmanship.

The green-trim highlight did not match the rest of the house Paint was sloppy and overlapping on to the windows and doors The wallpaper in the dining room was on UPSIDE DOWN! The sheetrock was uneven in EVERY ROOM! The tape/floating job was coming apart at the seams The spacing of the ceramic tile was uneven and not straight The added pantry wall was crooked The kitchen cabinets sagged The bathroom vanity did not fit the provided space–very odd design 18 of the 27 electrical outlet, phone, cable plates were grossly askew The cedar walls added in the den were not sanded prior to staining…rough and gritty The wallpaper in the master bedroom was not even and was already peeling

These defects were all in things that were done to the house since these people bought it! Talk about “quality workmanship”!

I could go on and on and on…but the biggest surprise is that the only thing straight in this house was the look on the owners face when they said they were asking $115,000! I am still in shock…which is why I felt like this had to be addressed.

You can not expect to buy a home for $25,000 or so…drive down to the local home improvement store, spend about $12,000, do the work yourself and expect to sell the home for $115,000 unless you have some pretty darn impressive carpentry skills.

Alex Vasser can be reached on Twitter at @alexvasser2.

Prequalified Versus Preapproved Mortgages

prequalified versus preapproved mortgages

The following is an extended-length guest post from Avky Inc.

By misusing these terms, lenders and real estate agents misrepresent buyers to sellers. Potential buyers may have the wrong estimation of their potential as well. All of this does tend to lead toward problems closing loans. Taking much longer than anticipated to close or not closing at all can be eliminated by understanding these two terms completely.

Prequalified Versus Preapproved Mortgages: Pre-Qualifiying A Buyer Adequately

It takes a little more than a few questions answered in a few minutes to fully pre-qualify someone for a mortgage. There has to be a tri-merge credit report, where all three major credit reports are displayed with all three credit scores. Usually, the middle score of all three is the determining score. Then the credit report has to be analyzed for derogatory items, their severity and history, as well as the amount of positive credit history.

Prequalified Versus Preapproved Mortgages: Debt To Income Ratio

Credit alone is not enough. The minimum payments showing on the report have to be added. That sum is added to the projected monthly loan payments for the level of house sought. These monthly totals are then compared to the monthly gross income, which is one’s pay before taxes and other items withdrawn. An examination of the details on a recent pay stub will be sufficient to determine this accurately. For self employed types, the adjusted gross income (AGI) of the last tax return divided by 12 can be used.

Then the monthly debt service totals are compared to the the monthly gross income, producing a ratio. This is the Debt To Income ratio, known to mortgage professionals as DTI. A DTI too high will reduce the buying potential of a borrower regardless of how good the credit is.

Remember this, sellers and seller’s agents. Don’t be mislead by a verbal prequal (mortgage lingo) or “puff letter”. Demand a breakdown of how the prequal was determined using this information as a guide. Otherwise, there could be a whole lot drama, which possibly may never get resolved, while the house is off the market.

Prequalified Versus Preapproved Mortgages: Pre-Approved Benefits

One may get something in the mail saying he or she is preapproved for a loan. How can that be without getting pre-qualified? It is a great idea for a home buyer to actually be pre-approved though. This is like having an open credit line for buying a home. It assures a quick closing, as the buyer has been fully approved by the lender. Then closing is contingent only on a sales contract and completed property issues.

The borrower has to meet all the lender document requirements, which are reviewed by lender underwriters. This is usually a time consuming procedure. A sales contract usually states that the buyer has 15 days or less to obtain a loan commitment. That often takes longer, maybe never! Meanwhile, the house is off the market, and the seller is not sure if the buyer has a loan.

Prequalified Versus Preapproved Mortgages: Credit and Income Approval

So with an actual preapproval, the buyer already has a loan commitment. Loan commitments, or credit and income home loan approvals, usually last for 90 days. That is, a deal must close in 90 days or less, and the buyer’s profile has to be the same then as it was when originally approved.

All that is needed to close is the purchase agreement, signed by all concerned, a title report, title insurance letter, and an acceptable property appraisal. Then everyone meets at the closing table. Seller or seller’s agent, if there is a claim of preapproval, insist on seeing the loan commitment letter, which should be from the lending institution. Then closing is really close.

Avky Inc is a distribution company based out of Phoenix. Avky Inc can be reached on Twitter at @avkyinc.

Patrick Mackaronis: Foreclosures Affecting Real Estate Valuations

patrick mackaronis

Every month real estate foreclosures seem to either break a record or come very close. Foreclosures in the United States have become a very large problem for home sellers and more generally neighborhoods. Not only do they detract from the appearance of the block, but when on the market, they often sell for 20% to 30% less than similar homes not in foreclosure. The following is a guest post by Brabble CEO and Founder Patrick Mackaronis, based out of New York City.

Enter Patrick Mackaronis

Appraisal Issue

Foreclosure sales are recorded like any other sale, so when appraiser pull up comparable properties, they automatically incorporate these depressed sales into their market value calculations. For sellers, that means most home appraisals in areas with an above average amount of foreclosures will reflect a lower market value.

To further exacerbate this problem, consider the fact that appraisals are backward looking. Appraisers rely on sales over the past six months to a year to value properties today. That means that the market could be getting better today, but homeowners will still have to contend with the depressed home sales from six months to a year ago.

Furthermore, this problem creates a cycle of depressed value. If prices were lower than they should have been six months ago and appraisers reflect those values in their reports today, home buyers will only be able to qualify for loans based on that data. Lower mortgage amounts and appraisals mean lower sale prices.

Potential Solutions to the Appraisal Problem

First and foremost, sellers should always take the time to walk through their home with the appraiser. They should be quick to point out the items that differentiate their home from the competition (e.g., new kitchen, remodeled basement, etc.). Don’t be shy about telling the appraiser the actual cost of the work, as he/she will probably add that to the value of the home.

The other solution is to have a thorough understanding of the neighborhood when talking to the appraiser. Be sure to let them know which house were foreclosure sales or sales in distress. Appraisers are often willing to incorporate feedback, since their goal is to most accurately reflect the value of the home. Feel free to communicate this information to potential buyers as well. Some buyers do not feel comfortable buying foreclosures because of the potential risks associated with a home that has been without a resident for a long period of time.

Don’t forget to let buyers know that the house was cared for in every way. Provide a list of preventative and schedule maintenance. Any warranties on major items provided are also a bonus.

Sellers should never try to compete with a foreclosure on price. They will not be supported by an appraisal and they cannot compete with a bank selling the house at their mortgage value. Sellers should focus on the above strategy to differentiate their properties from the competing foreclosures.

Patrick Mackaronis can be found on Twitter at @patty__mack.

Real Estate is Too Easy…NOT!

It is so easy to sell your own home–right? That certainly is the opinion of the general public. There is skill and expertise required to effectively market your home–that is where a real estate has professional training to help do the job. You see, thie key is to define your target audience, homebuyers, that is, and gear all of your efforts towards them. In other words you would not advertise in an “Auto Trader” magazine or RV Trading periodicals. The people that are reading those publications are not in the market for a home at this time. You are best suited advertising in a local real estate magazine such as “The Real Estate Book” or “Real Estate Source”. There are many publications out there–find out which is the dominate one in your area and go with it. You also might want to advertise in the real estate section of your local newspaper and/or the Internet. But that scoop is not where the skill and expertise end.What you say in your advertisement is equally as important as where you advertise. You advertisement needs to peak the curiousity of the prospective buyer enough to make them call you. Your advertisement does not need to be so detailed that a buyer prospect can make up their mind without even inquiring with a telephone call. The ad needs to call the buyers attention to your property and entice them to call you–you then become the salesperson! Also avoid putting your address in the advertisement–a buyer might drive-by at a time when the curb appeal is not at its optimum and never call!!! There are just so many things to know about the law in advertising–that’s set for another article.

More Real Estate Due Diligence: Post-Contract Steps Help Real Estate Investors Avoid Costly Shocks

As part of the pre-contract due diligence, a real estate investor who is interested in a particular property, such as a three-family house, confirms the leases and rents at the property, the amount of real property taxes, and how much the operating expenses will be. If the property appears to meet the criteria of the real estate investment plan, the investor and the seller will sign a contract. This is when post-contract due diligence kicks in. The due diligence period between the signing of the contract and the closing of title is the last chance to find out as much as possible about the inner workings of the property and to decide whether the property will be a money-maker or a financial black hole.

Post-Contract Due Diligence Steps

After the contract is signed, several steps must be taken at about the same time. The investor takes some of these steps and the investor’s attorney and lender take the others.

  • Property inspection: The investor should hire a licensed professional property inspector to look at the property from roof to basement.
  • Appraisal: If a conventional lender such as a bank or mortgage company is financing the purchase, it will arrange for an appraiser to determine whether the market value of the property is equal to at least the purchase price.
  • Survey: a conventional lender also will require a survey if the seller cannot or does not provide a recent one; the investor’s attorney can order the survey, which the title company also will want to see. Even if the financing is from a non-conventional source (such as savings, a hard-money lender, or the seller acting as lender), the investor should consider obtaining a survey to find out the boundaries of the property.
  • Review of seller’s books and records: The leases should reveal whether the owner or the tenant is responsible for the heat, utilities, water, and sewer bills. The lease also should state whether a tenant receives a Section 8 housing subsidy. The rents on the leases should match those listed on the rent rolls. The investor also must find out the amounts of the security deposits being held by the seller and where they are being held. Other records that the investor may examine include the rent-collection report, expense reports, and documentation of all work performed at the property during the seller’s ownership.
  • Title Search: The investor’s attorney orders the title work on the property. The title insurance company will search for all the recorded deeds, mortgages, liens, easements, and other interests in the property. The title company and the investor’s attorney will insist that all open items, such as open mortgages or liens against the property, be closed before the purchase can go through. When the title company is satisfied that the seller can pass clear title to the investor, it will issue a policy of title insurance that protects the investor from claims that the title that passed was not marketable and free of encumbrances.

Due Diligence and Real Estate Negotiations

Throughout the due diligence period, investors should keep asking questions until they receive satisfactory answers in writing from the seller. If the review of the books and records or the inspection of the property reveals shortcomings or substantial problems, the investor, through an attorney, should ask the seller for credits against the purchase price or other concessions.

The seller may refuse to do anything at first but, in a challenging real estate market, that stance may change if the seller sees that the investor is willing to cancel the contract and walk away from the deal.

Real Estate Crash: Lessons Learned

real estate crash

As the real estate market settles into the bottom and even starts to climb after the real estate crash, future homebuyers should take time to understand how the US real estate market found itself in such a poor state.

Real Estate Crash: Consumers View of Real Estate

Over the last ten years, homeownership went from a hard won privilege to a cheap lottery ticket. In the past consumers viewed owning a home as something to be strived for. They saved up 20% – 50% of the down payment and sought to make their house a home for the next 5 -10 years.

As interest rates declined and prices rose, consumers begin to look at real estate as a means to get rich quickly. In fact, many of the early investors did just that. Unfortunately, many areas simply became unaffordable and many buyers/owners were running very low on cash. As low teaser rates expired, homeowners could no longer afford to pay the mortgage and with home prices declining, selling became impossible.

Going forward, consumers need to shift their mindset. Real estate can be a great long-term investment strategy, but it also represents a very poor and volatile short-term investment. Relying on a short-term sale as an exit strategy to avoid mortgage payment resets will not work anymore. Taking a longer term view will add tremendous value to neighborhoods and significantly decrease the likelihood of foreclosure.

Financing Real Estate Purchases

Long gone are the days of a simple 30-year fixed mortgage after this real estate crash. Now consumers can access 40 or 50-year mortgages, option ARMs (adjustable rate mortgages), pick-a-pay and more. Understandably many consumers were confused by these choices and unsure of what their monthly payment would be. Resets always seem to hit at the most unfortunate time, sometimes doubling or tripling mortgage payments.

Everyone pointed the finger at everyone else. Consumers claimed they were tricked by unscrupulous mortgage brokers. Brokers said they were only pursuing the best incentives provided by banks. Banks admonished consumers for not reading and seeking to understand documents before taking on thousands of dollars of debt. In the end, everyone in the process was to blame and should learn for their mistakes.

Consumers should learn to read every document thoroughly and ensure that they know when and by how their payments will rise during a reset. They assume that they will be in their home for at least 5-7 years. Brokers should seek to better understand their clients’ needs. Does it really make sense for a school teacher making $30k to purchase a $500k home? Banks also need to be more vigilant. Relying on the foreclosure process to recoup losses has been a tough less for banks. Not only are they suffering huge losses on their loan portfolios, but they are also being heavily scrutinized by the government for their lending practices.

It’s a new day in real estate. Going forward, consumers need to take the lessons of the past two years to heart. A home can be a great investment, but in the end it should be a great home first.

Renting vs Purchasing: Advantages and Disadvantages

renting

It is a fact of life that most young people start off renting a house, apartment or flat when they move out of their parent’s home for the first time. The decision to buy a home is made after considering many factors.

According to the Melbourne Institute Household Financial Conditions Index, released recently, Australians living in Western Australia and Queensland are moving away from renting and are more likely to purchase real estate.

Renting: Advantages

  • If single, renting a house with friends or other young people can be cheaper.
  • Renting an apartment in a big complex can provide additional facilities such as a gym and/or a swimming pool which is fully maintained.
  • Weekly rentals are usually cheaper than a weekly mortgage for a comparable property.
  • No additional fixed outgoings such as council rates or water rates need to be paid.
  • Repairs to the property is carried out by the landlord (unless the damage is caused by the tenant).
  • Ability to vacate a property at short notice, usually one or two months.

Living in a Rental: Disadvantages

  • Landlord’s approval required to keep pets and/or have additional people live in the house.
  • Having to give access to a representative of the property managing agent every three months for an inspection of the premises.
  • No choice of decor in terms of colour or furnishings.
  • The landlord may require the premises to be vacated at a time that is not convenient to the tenant.
  • There is no ‘return on investment’ on the rent paid.

Notwithstanding, living in a rental property will suit some people at a certain stage of their life. For instance when one moves to a new state, it is prudent to live in a rental house while getting used to the area and deciding on where to set up home permanently.

It is also necessary to rent if one is aware that the stay in that area is temporary.

Buying: Advantages

  • Freedom to decide who lives in the premises and whether to have pets or not.
  • No quarterly property inspections.
  • Ability to renovate, redecorate or change certain aspects of the house to suit the taste and lifestyle of the purchasers.
  • The decision whether to move and, if so when, is made by the owners.
  • Wealth creation through capital gains and the ability to use equity in the property for investment purposes.

Living in an Owned Home: Disadvantages

  • The weekly mortgage repayment may be higher than the weekly rental for a similar property.
  • Having to maintain additional facilities like a swimming pool.
  • Total responsibility for all repairs and ongoing maintenance.
  • Having to pay other outgoings such as council and water rates.

Depending on the personal circumstances at any given point in time, renting real estate may be a better option than buying a property. However, in the long term investing in property could be a vehicle for wealth creation.