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What is an REO?
In Real Estate there is an old saying….everybody needs a place to live. Whether it be in a rental, a home you own, manufactured home, or trailer we all need somewhere to lay our hat. Because of that there are always ways to make money on properties no matter what the economic environment.
Right now we have a perfect storm when it comes to investing in Real Estate. We have record breaking low interest rates, and the lowest house prices in many, many years. Helping to fuel this down turn are REO properties.
So how does a property become an REO?
Well everybody makes mistakes, and when a banker is waving more money in front of our face than most of us make in years of working at our jobs it is very easy to ignore terms, like variable interest rate after 2 years. The well meaning banker says, “Well just refinance in 2 years, no big deal.” Then after those 2 years the cash they took out of their house is gone and their payment spikes $500 and the bankers are broke so there is no more money to lend. Puts people in a bad situation and causes a lot of foreclosures. And creates incredible opportunity for people who have lived within their means and now have some money to invest!
Most people don’t realize it takes a while. At least 3 months. I know of a couple right now that has been living in their home for over a year without making a payment on their loan. They are contacted every day by the bank asking for payment but the sheriff has yet to show up and force them to leave. That is perfectly legal by the way. They are allowed to stay until the bank files the necessary paperwork to instruct the sheriff to remove them. Most people leave well before that because the stress of collectors calling several times a day, along with never knowing if that knock at the door will be the sheriff coming to force you to leave, is just too much.
So say we have the Browns, dad was laid off, and now they are late on the mortgage let’s go through the process. First the banks have to inform them, they have not paid their mortgage. Then after about 3 months (it varies because all banks, like businesses, have different policies and procedures for handling this) the bank will start the foreclosure proceedings. They have to place ads in the local newspaper notifying other creditors that they are in the process of enacting their right as first lien holder to take the Brown’s property back for lack of payment. Some of the people that might be interested in this notification are their second mortgage holder.
Most people don’t realize if you have a second mortgage on your home and the first mortgage forecloses, the second goes away, they loose all their money. That is one of the reasons second mortgages have so much higher interest rates, there is so much more risk for them. Ok so it has now been 3 months and the first lien holder has notified the public, and the Browns have been sent a notice detailing the exact date their property will be sold on the courthouse steps. They really do that by the way. Watch your local paper and you’ll see the notices, then go to one. There is a representative from the county and it works just like an auction with highest bidder taking the property. You have to have cash though to buy it, no loans. Even before you are allowed to bid you have to provide proof you have the funds.
The Browns now have their sale date, the exact date their home will be sold. Is there anything they can still do to save their property? YES!!! They are allowed by law, until that property is sold at the courthouse steps, they are able to redeem it by paying that past payments and all the interest and fees for being late.
There are also ways of stalling the foreclosure. You have probably heard of people demanding the bank provide a copy of the note they signed. It won’t help them to get current, but will buy some time till they can come up with something else. For some people it is time to wait for the government to fix their problems, which I highly advise against. For most it is a way for them to stay in their home just a little longer.
Now the Brown’s property is sold to the highest bidder. They no longer own their home. This is where it can get quite dicey. The new owner is responsible for removing the Browns. A lot of people because they have gotten a great deal on the house will give the Browns some money for moving expenses.
I even have a good friend who buys these properties and frequently rents the home back to the previous owners. Sometimes for years, if they are good about paying their rent on time. In fact he has let many people eventually repurchase the home, given enough time to either fix their credit or come into some money. He even lets them repurchase at a greatly reduced amount. Remember the second falls off after the foreclosure so Bob can sell them the home much lower than he bought it and still make a nice profit for himself. So even with all the doom and gloom portrayed by the media frequently foreclosure helps people out of a really bad situation. One of the most stressful things in life is worrying about loosing your home, it breaks up marriages, splits families and it general, really sucks. I think this is why most people leave the home before it is ever sold. Just to be done with all the uncertainly.
To insure an adequate price for the property, the court has the power to deny the sale.
Types of foreclosures
After being late for 2 months sometimes as long as 12 months after the first missed payment the lender will start legal proceedings. A lawyer for the lender will send the borrowers a letter with the notice of default and give them a chance to cure the default by paying all the back payment plus penalties. He last day given to make these payments is known as the cure date. When the cure date had passed the lender will accelerate the mortgage and call the entire amount due and payable plus penalties and attorney’s fees. The borrower can still bring the mortgage current if they also cover all the attorney’s fees and get the payments current.
When the mortgage is accelerated the lender has to file a suit in court, then provide public notice of the foreclosure action 3 times, usually once a week for 3 weeks in a newspaper with countrywide circulation. This can vary depending on which state you live. There are 4 most common varieties of foreclosures, usually one of these will take place.
Judicial Foreclosure Followed By a Sale
This is the most common method of foreclosing. After the court action and public notices, a sale is held usually on the courthouse steps. If there are no bidders willing to pay the amount owed, the ownership goes to the mortgage holder. If there are bidders and the amount exceeds the amount owed the excess will go to the borrower who is in default.
Non-judicial Foreclosure Followed By a Sale
In a few states property can be sold without judicial proceedings. These states usually use a deed of trust instead of a mortgage. Regardless the instrument will contain a power of sale clause which spells out what constitutes default, the way in which default will be advertised, where the sale will be held, and when the deed is to be given. This sale is generally held the 91 st day following the advertisement of the notice of sale.
Strict Foreclosure
Once the court issues a Decree of Foreclosure, the borrower has a short period of time (usually six months) to redeem the property by paying the entire amount due plus penalties and expenses. If this is not done, the court will confirm title to the lender without public sale. Only a few states namely, Connecticut and Vermont use this process.
Judicial Foreclosure by Entry and Possession
This is similar to strict foreclosure except that a redemption period exists both before and after title passing. After the lender receives a Decree of Foreclosure in a judicial proceeding, the borrower is given a specified time to pay the amount in full. During this time, the borrower may have possession of the property. After the redemption period has passed, the lender can enter and take possession of the property. An addition period of redemption continues after this possession. This process is used in several New England states.
Right of Redemption
Some states provide a statuary right of redemption to the borrower even after the property is sold. This period can be as long as two years in a few states, but more often the period is six months or less. Other states like Florida, for example, have no statutory right of redemption but the courts have allowed redemption for a short period of time. In Florida it is 10 days. This is known as a case law right of redemption.
This is the final opportunity for the borrower to redeem the property by paying the entire amount due. On occasion, this redemption period will give you a chance to make money. If the property is a true bargain and if the mortgager who lost the property has no intention of redeeming it, you could by paying the lump sum, acquire the property now. Generally, this won’t happen because if the property has a large amount of equity, the original borrower will want to redeem the property.
Elimination of Liens in Foreclosure
Mortgages don’t come with numbers. When people say first mortgage or second mortgage they are talking about the first mortgage to be recorded in the public records at the courthouse. A mortgage filed second would become the second mortgage and so on. Other liens might be filed also, like IRS tax liens, mechanics liens filed by a contractor, or judgment liens filed by doctors or other creditors. These liens take priority based on their order of filing. They are junior to all liens filed before them and senior to all liens filed after them. The only exception is real estate tax liens are superior to all others regardless of when they were filed.
When a property is sold at foreclosure, the lien being foreclosed and all liens junior to it are eliminated.
Best ways of finding foreclosures
So how do we find these great deals? One website I’ve found is foreclosure.com. Being a Realtor I can use my MLS to see if the properties listed on there are current. Foreclosure.com is very up to date. There were only a couple of homes in my area that were NOT current and all were listed by an agent, who probably just had not gotten back yet to remove it. This is one of the huge problems when using a website to find foreclosures, especially if you are paying for the privilege of using the site, you don’t know if the property is still available.
This where is pays to know a Realtor. When I say Realtor I mean a Real Estate Agent that belongs to the National Association of Realtors. That means that agent pays lots of extra money to belong to a group that adheres to a code of ethics set down by NAR. There are a long list of rules, all very valid, to keep agents honest, and on task. Real Estate is messy, and there are a ton of technical details to know. Hardest of all is that every single property is different.
A good Realtor will be worth their weight in gold, with how much time, energy and money they can save you. Remember broker fees are FREE TO BUYERS!!!!!! You can sign an agreement to only work with that agent and you’ll get even more effort out them but it is not necessary. If they are a good agent they will work hard for you and get you an excellent deal. Realtors also have lots of tools you just don’t have access to. Most Multiple Listing Services out there have ways of finding out how much the bank bought the property back for, and when.
What is also really nice about Foreclosure.com, and many other websites, is that both Realtors and owners can put their properties on there so you get a good mix. I cannot state enough the importance of using a professional to make the offer and finalize the deal. That means even if you are buying from an owner have your agent write the offer and make sure it goes through a reputable title company. So when you sign your name to the note you are not assuming a bunch of bad debt from the other owner. A Realtor will also benefit you here because they will do a market analysis on the property and ascertain if it is worth what the owner is needing to get, if not, move on.
I know of a couple let’s call them Bob and Shari who, having a little bit of cash bought a property at the courthouse steps. They were all excited at buying this 3 bedroom 2 bath property, for $20,000. WOW that’s just like that infomercial we all know about tax sales (which don’t work by the way)!! After plunking down their hard earned cash, anticipating all the dollars they would make when the rehab is done and they could resell it, dreaming what they would buy or pay down with all that extra cash….Then they get a notice from the first mortgage……Yes people they had bought the second mortgage, not the first. So now they are in the same position as the previous owners, too much loan with not enough property to back it up. The good news is, they called their Realtor who at first giggled a little because she had told them to call her if they were interested in any places and NOT to buy until she could check them out. She did a market analysis and was able to help Bob and Shari refine their plan, cut out updates that wouldn’t give as much advantage to them in the market, and helped them to sell the property for a very good profit that included paying all the brokerage fees. In general got them out of a very sticky situation that could have ended up bankrupting them. Houses are expensive and unlike buying a car, a bad move can ruin you financially for many, many years. This is why it pays to use professionals who can help you to maneuver the hurdles and challenges that come with every property, successfully.
The thing that keeps people coming back for more when it comes to foreclosures is the price. Even though frequently there is years of deferred maintenance, and neglect. Because of this down turn in our housing prices I was finally able to find my mom in law a home. It was a foreclosure, that was listed by a local Realtor, but was built in 1925 and didn’t have a crawl space. Now you say well so what, it has level floors and looks really good inside. Banks will NOT loan on a home with no crawl space. They want to be able to see what they are buying. If the whole underside of the house is rotten very soon you could be walking to go to the bathroom in the middle of the night and fall through the floor (this is NOT a joke! It happened to me!).
So I found a private investor that gave us a loan with a balloon payment due in 5 years. Now my mom in law has the ability to fix the house’s problems before the 5 years is up so she could get a bank loan plus a smok’in good deal on her first home. She was smart about it too, she had a foundation put under the house before she ever moved in. We completely went through and fixed all the red flags the bank don’t like (with the help from her friendly Realtor!) like random wires hanging out of the wall, putting up gutters, paint everything, caulking in the shower, yard cleaned and organized. These all add to the overall look of a property. She can take her time now and find the exact right loan for her and her position and she has 5 years to do it!
Almost all of the properties that banks take back through the foreclosure process will be turned over to a Real Estate agent. I have only seen one property in all my years of investing that was being sold by the bank (I bought it! And they gave me financing over the phone, excellent deal but very, very rare). So if you see a sign on a property call it and find out what is going on with it, you never know what opportunities might be right around the next corner.
How do I find the very best investment in the shortest time?
Research is the key.
The first place you should go, is your local Realtor. They can easily and quickly search through the MLS and find you lots and lots of foreclosures. The key to finding the good deals is checking on new listings daily. Most of the time the really good deals only last a few days! That is why you have to be vigilant in knowing the market, also why it pays to have a go getter for a Realtor. If you communicate with them exactly what you want to do and the time frame you are wanting, if they are a go getter they will call you within 24 hours with more properties. If they don’t they are not motivated enough and let them go. I am never opposed to working with them again, if they come to you with a fantastic deal then look at it. Just don’t put all your eggs in one basket. Don’t let one agent monopolize your time if they are being lazy, move on, call somebody else who wants to work.
I remember when I bought my first house. A friend of a friend was an agent. He said he would look for properties for us. My hubby and I ended up driving around looking for ourselves because he was never available, and would never return our calls. We found the house we ended up buying, and wanted to see inside, again could not get hold of him so we finally called the listing agent who was there within minutes showed us inside and told us all about the property. The listing agent did our agent’s job, he sold us on the house. We called our agent and when we said we wanted to put in an offer he was suddenly very available and wanted us to come to his office right now. We had already been pre qualified and were ready to buy. We got an accepted earnest money agreement, so we ordered our inspection (again was the agent’s responsibility) it appraised at the sales price and we get down to the closing table and our agent has gone out of town, and taken an important document with him, so we couldn’t close. Of course we had taken a couple days off work to move that weekend because we were supposed to be able to move in, and of course our house closed 5 days late because our agent was only concerned with his life and had no consideration for anybody else.
So don’t let people get in the way of you finding what you want. That is the key in Real Estate, tenacity. You will get 12 NOs to one YES! But how sweet that one yes will be and how much money you will make on it! So it is very worth keeping to your plan and forging ahead. Don’t loose hope! Just when you think the property you are looking for is not out there you will turn a corner and see that little sign in the window.
The internet, is a powerful tool to find, research, and buy REOs.
I have gone through and checked out a great number of Foreclosure sites and here are my very favorites and un-favorites.
foreclosure.com : excellent site! Very easy to use, also gives you addresses on a map for ease of finding the properties. You also get a free week to try out the site before committing to belong, which is very nice. Most of the properties in my area were current. A couple that were listed by an agent were already sold, which is disappointing. I would like to see it updated more frequently, could be the fault of the agent though, just forgetting to remove the listing. At $38.50 a month it is one of the lowest priced and overall very informative.
RealtyTrac.com : is probably one of the most common and most known and you pay for it. They do update the site very frequently. I didn’t find a single property on there that was already sold, which is impressive.They also include a lot of information about buying homes in general and about buying foreclosures which is a huge bonus. The $49.95 monthly bill though leaves a lot to be desired.
HUDforeclosed.com : This site is set up to connect sellers and buyers. There is a blog section and a forum section where you can place ads for sellers or buyers. You can also ask questions of the group which is nice. There are several asking for owner carries, information from professionals in Real Estate, and other free information which I always like to see. There wasn’t a lot of activity on the blog or forum section (the last post was 14 days ago) so getting answers might be a problem. At $40 a month it is not a bad deal, if you join for 6 months it goes down to $16.50 a month. Worth spending the $1 for a week introductory membership.
foreclosurefreesearch.com : Frankly I am not impressed. I didn’t find one property that was current. All were listed by Agents who hadn’t updated the listings, and the site hadn’t updated the listings either. I also had a hard time maneuvering around the site I found lots of dead ends then I had to go back to the home page and start over again. Even at $9.95 per week it is not worth it.
Is it better to buy a foreclosure, or a short sale?
There is a big difference between a short sale and a foreclosure, although both might be a really great deal for the buyer. The big problem with short sales is you never know if the bank will actually take the price they have put on the property. A short sale means that the owners owes more money to the bank, than the price listed on the property.
For example we have the Browns again. Instead of letting their home go into foreclosure, they are trying to sell it for market value. They bought their house for $285,000 when prices were high and now their neighborhood has come down $60,000, so their house is only worth $215,000. They have decided to sell their home short of what they owe, and they have it on the market for $199,000. Why so low of a price?
The price on a short sale is what the owners are hoping the bank will agree to, the price on a foreclosure is what the bank is hoping they can get for the property
The Browns don’t care at this point what their house sells for. They will either short sell it or it will be foreclosed upon.
In showing a short sale one time, it said on the listing, call and then show. So I am on the doorstep clients in tow after calling and letting them know I was coming, and the owners will not let me in. They said, “We’re not selling the house the bank is”. Be ready for resistance when approaching these owners, they don’t have anything to loose.
So, back to our story, Mr. Green comes along and thinks “Wow that is a fabulous deal!”. He contacts a Realtor and puts in an offer of full asking price to the Browns. Everybody (except the Realtor because they already know what will happen) is very happy and excited. Mr. Green will get an awesome deal and the Browns will get out of a bad situation.
The offer gets sent to the bank for approval, because remember the bank has to take a $85,000 loss on the note and it also has to pay all the closing fees, in order for this deal to go through. The first week everybody is still excited, the second week of not hearing from the bank, hope is beginning to wane, after a month Mr. Green withdraws his offer and moves on to a foreclosure.
Most of the time the banks will not respond quickly, if they respond at all.
You may say it is in their best interest of the bank, to get the house sold and off their books before they have to spend even more money to foreclose on it. You are completely right. But so what? We have all found ridiculousness in big business bureaucracy. How do we know they are not making more money by foreclosing and being able to take the loss off their books in another way.
It comes down to this, the price on a short sale is what they are hoping the bank will agree to. The price on a foreclosure is what the bank is hoping they can get for the property . That is why unless it is a truly awesome property for a ridiculously low price, and there are other people interested, offer less than the asking price when bidding on a foreclosure. If nothing else it starts the communication. BUT, if your Realtor says, “There are other offers on the table if you really want this house I recommend we do this______”.
If you trust them, do what they say! They don’t get paid unless you buy the house, it is in their best interest to help you! Now if your Realtor is the listing agent, ignore that. Most people don’t know the listing agent has a fiduciary responsibility to the owners that supersede their responsibility to you. Never buy from the listing agent!! Always get yourself someone you can trust that will only be on your side, more about this in the ethics in real estate section.
Keep in mind when viewing these foreclosures, frequently there will be problems that will inhibit your ability to obtain another loan on that property. For instance, there are no gutters. Well that right there could stop an FHA loan. A hole in the carpet would stop an FHA loan. Then there are tricks to fixing the problems. A hole in the carpet, no problem cut out a piece of another carpet and fit it into the hole. Not pretty but it will then pass their inspection.
The key to everything comes down to the appraiser. Appraisers don’t want any bank coming back on them for saying a house was worth more than it really is. In fact that kind of puffing can ruin an appraiser’s career.
Overall it is much better to buy a foreclosure, or a pre-foreclosure than a short sale, only because most banks are not motivated enough to respond in a timely manner. An offer that has sat for a month rarely ends up going through. Most transactions take 3 days at most of negotiations for buyer and seller to agree or terminate the offer. Now I am NOT saying it doesn’t happen. If there is one constant in Real Estate it’s that there are always exceptions to the general rules. With tenacity and follow through, you can make short sales work, just takes a lot longer and has a lower average of success.
How do I know it is a good investment?
This is one of the most important questions to ask yourself. Another TRUE STORY will illustrate this point perfectly. Meet Zack and Sara, they are first time homebuyers wanting to buy a really good deal. Anne, a Realtor in my office, immediately shows them some excellent buys. Nothing is quite what they want until they found a regular listing and put in a low ball offer and it is rejected.
Anne tells them, “It is only our first offer, let’s find a foreclosure that can go a lot lower than market value, then you get the added bonus of instant equity!!”
A couple of weeks go by and they call to say they have an accepted offer on a property in a good neighborhood. They say it was a foreclosure and that they had gotten an excellent deal on it.
Without calling their Realtor they let the listing broker talk them into paying full asking price, $202,000!!!
Anne decided to check it out and see if they had indeed gotten a good deal. The bank who sold it was in the first position on the property, so they had foreclosed on a $120,000 loan.
The owner had a second mortgage in the amount of $65,000 but so what!
As we have already leaned, the second drops away when the first forecloses. The bank’s cost on the property was about $150,000 including Real Estate fees, lawyer fees and foreclosure fees.
So poor Zack and Sara over paid by over $50,000 dollars!!!!!
They were taken to the cleaners by the listing agent. Zack and Sara walked up and let her know everything about their situation, they were already approved for a loan (Anne had made sure they were ready to buy) and they told her where they were approved at and for how much. Guess what? It was exactly $202,000! WOW! What a coincidence.
The listing agent has no loyalty to them, she has loyalty to her sellers, so she talked them into what the sellers wanted. So sad, they thought they knew exactly what they were doing though. Has happened to too many people to count!
Be smart and don’t let it happen to you!!!!!
This is why research is the key to finding a good investment. Now Zack and Sara are in a house that is worth LESS than when they bought it and it has only been 6 months! And it was a foreclosure!! They should have walked into that deal gaining equity. So instead of being in the position of not able to sell their house they would have $20,000 at least worth of instant equity!
The fact is, the property was over priced when they bought, and they over paid by thousand of dollars!!! Again research is the key to getting a good investment. KNOW YOUR PROPERTY!!!!
How do you know a property is worth the price tag on it?
Several different ways, that we will go through in depth, and I will also give you ways of finding out the information on your own.
- Research, research, research! Know that property thoroughly.Does it have irrigation rights? If so are they current? Howmuch did the seller pay for it? Are there any code violationson the property?
Can you know the details of a property without having to call an agent?
Yes! All of this information is public knowledge. In my county we are lucky to have everything online. I can pull up well logs and irrigation rights and find out everything I want to know very quickly. For a new person your best bet is to go down to the county assessors’ office and ask. They will help you go through the process to find out everything you can about the property.
Now how much the seller owes is another matter. Our MLS has a special link that gives us access to past loans and amounts owed on the property. That is NOT public information and without being an agent you won’t know. Everything else though will be down at the County Assessors’ office and except for making copies it is free for you to search through. In fact in our assessor’s office they have a couple of computers all set up specifically for the public to research properties on.
- Comps, or Comparable Market Sales. What have properties sold for, located around this property?
Remember the comps that count have the same square footage, same amount of property, and close to the same age. Here is where the 10% rule comes in. If you have a 1979 house and you are trying to use a 2008 house as a comparable you are going to run into problems. Using a 1985 house as a comparable for a 1979 house you will probably be ok as long as the square foot is close and has similar amenities.
This is one of the places where Real Estate gets really complicated. Depending on how stringent the bank is with their lending policies and how much down payment you are coming in with, how much the purchase price is, do you have verifiable income, condition of the property, ect., ect. All this will determine whether or not the bank will finance the property for you.
Don’t get me wrong, if you don’t have a large amount of cash down, there are still opportunities out there. It might take longer to find that perfect situation, but in Real Estate there really are homes for almost everybody. Just takes dedication and work to make it happen.
For instance here in Oregon, we have the Oregon Bond. This will enable you to get 100% financing! In our current conditions that is very hard to get. It has it’s own challenges though, the property has to be considered rural, and there is mortgage insurance and there is a fee to be able to get it. But you are able to get in for almost no down payment. What is really neat about it is that places you would not think would be considered rural are! We have many surrounding towns that are close in but still considered rural. Most states have some form of special financing, very worth checking out.
In keeping with the challenges of financing, I will pass on one of my own investment stories….the one that got away. It was a lovely fixer upper in a good neighborhood, a foreclosure, at a really great price. This was back in the good ol’ days, when banks were throwing loans at people. We got an accepted offer at a ridiculously low price, got our inspection done, and were all set to close on our newest flip.
Then we get a call saying the bank doesn’t like what the roof looks like. This was only my third or fourth flip many years ago, so naive me says, “Oh bummer we lost the $350 we invested on an inspection and the $40,000 we expected to make when we sold” and moved on. Now I want to kick myself, because the bank we had talked to was Countrywide and they are very picky.
If I had had a good Realtor to contact, they would have told me to go to another bank, or go to a Mortgage Brokerage that would have the ability to shop around and get us a bank that understood we would be fixing the problems on the property. We also could have done a construction loan, although these are much more expensive we were planning on flipping the property and would only own it for a short time.
Brings to mind that old saying, “Hindsight is 20/20”. LOL!
So Bank loans can be very challenging. The trick is to know as muchas you can about the property and about your financial situation. Right nowone of the biggest challenges is getting the appraisal to go through. Buyingforeclosure lowers greatly the odds of not getting a loan because of a badappraisal, but they never truly go away. The lack of sold comparableshinders justifying the purchase price.
For instance you have 3 sales around your investment and 2 were foreclosures and both sold for $199,000, the other sale was an owner occupied and sold for $205,000. Even though the foreclosure you want to purchase is 300 sq.ft. bigger than any of the other comps, and much nicer, the $230,000 price might cause you problems. That is why you need to know exactly what the house is worth right now, in today’s market.
When looking at comparables for a bank loan, most banks follow the adage Rural properties you can go out 5 miles for comps, for city comps they have to be within ½ mile, and they have to be sold within 6 months at most. And you can’t pick and choose which properties you want to include, when it comes to the appraisal portion of the process. The appraiser includes what they think is important.
Sometimes you can show other sales that the appraiser might havemissed. It takes a great deal of tact and careful presentation to getappraisers to change any comps they have come up with. A delicatebusiness because you do NOT want to put them off, they have a lot ofpower when it comes to getting a bank loan, but is possible to present othercomparables and have the appraiser present those to the bank.
Appraisers and Realtors access the same MLS to find com-parables!
This is one of the times it pays to have a Realtor on your side. Because when you have gotten to the point you have put in an offer, had it accepted, had the inspection done, and now are doing an appraisal, you do NOT want to find out then, the banks will not provide a loan because the property is not worth the amount agreed upon. Keep in mind you have to pay for the inspection $350, and the appraisal $450. As soon as you start to shell out money, you want to be as sure as possible the deal will go through or you are just wasting money and time. Always, before you put in an offer, have your Realtor do a market analysis. I do it with any property I am interested in buying, and I do it for every one of my clients. Even if it looks like it is a no brainer, still do the research, it will save you so much in the end. It will give you the concrete data showing where in the market this property stands.
Best ways to safe guard my family and my finances from my REO investment.
Have a plan!!!! So many people don’t think any further than being able to get the property. What do you want to do with it? Rent it, flip it, live in it. Have a written down, well thought out plan that has complete agreement from everybody involved. Get the “Team’s” vote!
Then BEFORE YOU BUY talk to some people who are knowledgeable in Real Estate about your plan. You don’t have to tell them which house or any details, in fact unless it is your Realtor, I highly recommend don’t tell anyone what property you have found. Having seen far too many homes snatched out from under people by another bargain hunter that over heard them in the grocery store (don’t laugh, it happens more than you think!) don’t tell anyone what you have found until you are under contract.
When speaking to your team, discuss the concept of what you want to do and listen to the obstacles they come up with. Remember they are NOT squelching your dream they are helping you to problem solve. Then come up with solutions to the problems they came up with. I love doing this with my principle broker. He has a great deal of Real Estate knowledge so when ever I am stuck or just want to bounce ideas off someone I bug him for a while. He gets a free cup of coffee and I get some very valuable insight.
Another good idea is to contact a financial planner and check on your overall financial stability. There are many online and many in your area that can help clarify you money goals and outline and ways you can better your situation.
Here are a couple of websites I thought had lots of excellent information:
Pre-Qualified what does it mean, how do I get it?
Pre-qualified is very important when putting in offers on foreclosures. Pretty much all the banks require you to have a pre-qualification letter from your lender in order to put in the offer. If you are paying cash you need to have proof of funds, like a bank statement, or a letter from your bank saying you have the funds available, will work.
A pre-qualified letter is something you get from your lender that says you are pre-qualified for a certain amount and usually what kind of financing it is, VA, construction loan, conventional, or FHA. There is a big difference between pre-qualified and pre-approved. Pre-qualified means that you have met with the lender, shown him your tax returns, told him how much money you want to put down, and gone over some terms of the loan.
Pre-approved has a lot more weight to it. Pre-approved means you have had your credit checked, all documentation is into the lender and he has turned that in to the bank and gotten a pre-approval directly from the bank. It means you are approved for a loan with that bank for that amount. When a foreclosure bank is looking at the offers coming in, an offer that has a Pre-Approval will carry much more solidity and even if the offer is at a lower price, your offer usually will be favored because they know you are ready to go. You already have the ability to purchase the property.
Now, because of our current economic conditions right now if you need a loan in order to make your dreams of owning a foreclosure come true, go there first. Don’t waste your time or anybody else’s until you know exactly how you are going to pay for your foreclosure.
Talk to your lender and get them to print out a letter for you, or they can fax or email it over to the Realtor you are working with. Better to have your ducks in a row then if an incredible deal comes on the market you are not scrambling to get everything together.
Note on lenders:
Not all lenders are created equal!!!
Each lender has member ships with banks they pay to belong to. Your local Bank, if you have a long or good relationship is a good place to start. Keep in mind though Mortgage Brokers will belong to a number of banks and can be an easy one stop way of going. It saves splattering your credit all over, and having it checked repeatedly, which costs you points on your credit. A couple lost points here and there can cost you getting a loan.
A good idea when you are looking a for a lender is to call them and ask what banks they work with, if they can do FHA, then ask interest rates and some terms. You won’t get a lot of specifics to your individual needs over the phone because they really need your financial situation before they can ascertain exactly what they can do for you.
One of the best way to find good mortgage brokers is to ask your Realtor, ask your friends, find out who people liked, then BEFORE YOU COMMIT to them, interview them. You wouldn’t hire the first doctor who wants to operate on you! You would do some research, find out about them, what they specialize in, how many law suits are against them, ect. A little bit of information gathering will save tons of time and effort later. And most of all will save you money!
You have found the Perfect Property, now what?
Now is the time to gather your “Team” and show and discuss all the good and the bad in relation to the property. In proving to them why this is a good deal it will show you what parts of your plan might need work and will help you to refine your offer. The offer is a legal binding document, and at risk is your earnest money. If you have cleared all your contingencies then at the last minute find another property you will loose your earnest money.
Any smart Realtor will give you ways of getting out of the deal if something unforeseen should come up. For instance, if you need to get financing in order to buy the property they can say something like “This offer is contingent upon buyer and property qualifying for a conventional loan in the amount of___”. BUT, in saying that, if there is another offer on the table with no contingencies, even if they are offering less, the bank might prefer to take that offer because it is much stronger. Their offer has less ways of the buyer canceling the offer without having to pay the bank their earnest money. Since whenever an accepted offer is in, that property goes off the market, sellers are risking missing a higher quality offer (higher price, all cash deal, no contingencies, ect.) while under contract.
Once you have your plan in place get your offer in as soon as possible. I have seen far too many deals missed because little Suzie’s recital was later that night and they didn’t want to do it then. It only takes a half hour at most to get all the paperwork signed if you know what you want to do. It is well worth going right then and putting your hat in the ring. Most offers are only good for 24 hours, so frequently the seller thinks about it for a night and accept or replies with a counter offer by the next morning. As soon as they accept that offer, if another one comes in they can’t take it. An earnest money agreement is a legally binding contract the sellers and could face a law suit if they break it. So get the offer in ASAP!