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Is Buying Foreclosed Homes a Good Idea? 6 Things To Know Before Buying

The real estate market of 2012 is flooded with foreclosures that are practically crowding out the private residential market, with 4 Million having hit the market since 2007, and another 4 Million expected in the next two years. Is buying a foreclosure worth it? Would be home buyers obviously think so, as foreclosures and short sales are virtually the only options they will consider. However, buying a foreclosure involves much more effort than the traditional venue. Patience is a virtue.

The competition is fierce, with corporations hiring squads of realtors in the quest to purchase 5 to 7 properties a day, not to mention smaller investor groups that have been buying foreclosures for years and possess extensive knowledge of local markets.

It has been reported that 31% of California foreclosure sales are in the form of all cash.

Notwithstanding this awesome obstacle, would be home buyers who have the perseverance and patience to stick it out will most likely be richly rewarded. It should be recognized and accepted that the dynamics of the real estate market have completely changed, as home sellers typically are no longer individuals looking to sell due to job relocation or other worthwhile reasons, but namely almost faceless adversarial corporations with deep pockets. Is buying a foreclosure worth it? Absolutely.

Successful Techniques in Buying a Foreclosure

  • Auctions: This is by far the riskiest of propositions, as properties have to be bought sight unseen, and horror stories abound of frustrated former homeowners demolishing their properties out of anger.
    Normal repairs such as painting, remodeling, or new carpets, are widely expected; however, structural damage to the plumbing or electrical systems can quickly turn the investment into an absolute nightmare. This venue is best left to savvy investors with the necessary trade connections and resources. If the structural damage is so extensive as to force investors to walk away, you can always pick it up at a later stage on much more advantageous terms anyway.
  • Realtors: It is strongly recommended to buy a foreclosure with the help of local realtors who have a deep understanding of local pertinent factors and who can also assist with negotiations and paperwork. Realtors who specialize in foreclosures are especially desirable as they may have the inside track on new listings that have not been made public yet. Also ask for a Broker’s Price Opinion (BPO).
  • Market Value:  Real estate values can change rapidly, therefore, keeping track of local developments can give a more accurate view of a fair bid. For that purpose, Zillow.com is the best way to keep a pulse on the market, along with getting precise information about liens and mortgages on the properties so that you can make an educated guess about the goals of the selling banks.
  • Bids:  It stands to reason to always bid low, but not too low. Banks are not keen on multiple counteroffers and will usually respond with a Highest and Best Bid proposal. A rule of thumb is to bid at 70% of market value to allow for repairs that may be more extensive than expected.
  • Financing: Get pre-approved, not pre-qualified, as time is of the essence. Repairs are also inevitable in a foreclosure, thus it is advisable to add potential repair costs to the approval amount. If repairs cannot be afforded, the property may be unlivable anyway.
  • REO: Pretty much not open to the general public. Insiders only please. Tip: the purpose of combing through foreclosures is not to find a property, it is to find a realtor who is a bank agent and can get you these REO listings.

Is buying a foreclosure worth it? If the first attempt fails, you can be assured there will be more foreclosures to look into.

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