As an agent, I occasionally have buyers who say they want to buy a bank foreclosure, thinking it will be cheaper, since there are so many foreclosures! But as in all things, there is more than meets the eye with foreclosures! Actually, in Rochester there is not a lot to choose from, the foreclosure market is relatively small compared to other parts of the country. A search of the local multiple listing service of REO, or bank owned , HUD or government owned listings over three counties yielded a mere 64 properties ranging from $499,000 for a 54 multi-use unit to 20 thousand for a two family. There was exactly 1 HUD offering! Some were beautiful homes in pricey suburbs, regular family homes, or investment properties. in either move-in or rehab condition. Are they really bargains? That is up to potential buyers to determine, but how to do that?

In other parts of the country, corporate investors armed with cash and the ability to move quickly, buy up large numbers of homes daily. The average buyer has to compete with them, at a disadvantage. The investors looking to buy very cheaply and often; have buying power and large sums of cash allowing them to deal directly with banks. They are looking for homes to hold as rentals for eventual resale when prices climb again. Rochester does not support these buyers since foreclosures here are relatively rare and are generally offered for sale with little discount. Lenders know our market does not have a glut of homes with depressed prices, and as a result, chose to list their foreclosures with agents, in order to maximize their return.

While tax auctions can offer relative bargains, this avenue is best left to seasoned investors who can afford to take large financial losses, should a property prove to be in far worse condition than initially estimated, potentially turning “a steal” into a money-pit. Novice investors or home buyers should not be comfortable with the large margins of risk involved here. When sold in a tax auction, all debt/liens on the house are usually discharged (not always so in bank auctions). Due diligence is crucial before bidding, not after! Working with an agent to identify foreclosures is a better choice for the average home buyer or novice investor. Buying listed foreclosure properties offers buyers opportunity to do their due diligence for repairs and title issues.

To be prepared buyers should assemble a team as follows: A savvy Realtor familiar with the process, a lender, who has pre-approved their mortgage amount, a reliable contractor available to price out repairs –if the buyer does not know how, an attorney, who must be familiar with pitfalls in foreclosure sales (hint: ask your agent for names) And last, a quality home inspector should be included on the team. Smart buyers work with experts to avoid being stung buying homes that prove to be financial disasters! This is not a time to be penny wise and pound foolish!

Finding the right agent is paramount. Working with an agent costs buyers nothing! Sellers pay the listing agent, who in turn pays the buyer’s agent. There is no advantage to not having representation. The right agents understand the ins and outs of buying foreclosures. Full time agents work every day in the market place and are aware of neighborhood trends. If not, they have knowledge of and, accurate tools to see what the trends are. Agents prepare offers, properly structuring them for the buyer’s advantage and protection.

A smart agent will insist the buyer line up a mortgage company or provide proof of funds-if a cash buyer; to make sure the client is financeable or has the money to buy.  There is nothing more stupid than an agent who takes clients to see properties, not knowing if they can actually buy! The mortgage officer should be familiar financing foreclosures and be able to offer options and suggestions to structure the loan. Sometimes a foreclosure doesn’t qualify for conventional, FHA or VA financing, due to property condition. 203K or “HomePath” loans, allowing buyers to roll rehab costs into the mortgage may be offered. These loans are not simple and require a qualified mortgage officer to explain them to their client, as well as process them to the closing table. Not all mortgage officers think outside the box, with foreclosures they need to. Buyers must be honest with their mortgage officer about whether they plan to live in the property or want to flip it. There are restrictions with some of the loans in regards to flipping, with serious penalties. A quality loan officer can make the difference between a deal coming together or not.

Never buy foreclosures sight unseen! It’s crucial to calculate costs to make the home habitable. It may have been completely trashed or stripped out, missing cabinetry, copper plumbing, furnaces, air conditioners, even lighting or moldings. If not destroyed, they might have been removed for resale! Repair costs must be decided before writing the offer. The actual cost of the home is what you pay AND cost of repairs. Remember the property might be bought for $80,000, repairs totaling $20,000 but actual value is only $100,000 even after repairs. This is not a bargain! Financially this home does not work, if the plan is to resell it! In Rochester, this is a common scenario, making flipping of properties pretty hard to do.

Once a potential buy has been gone through and identified as a “buy”, quality agents’ supply needed information, including a comparative market analysis. Buyers and agents should research the neighborhood. Is it stable or in a down-ward trend? If it passes muster, the agent helps with pricing. Offering random numbers like half of the asking price, is a waste of time for everyone. Banks are not desperate; it’s a rare situation where a bank accepts such a low offer. A more realistic offer is come to by estimating the worth of the house in good condition. Subtract the cost of repairs; do not exaggerate. Possibly repair costs were figured into the banks asking price, if so, no deduction. An agent can figure if a discount was included. Banks may partially discount, if so, the rest of repair costs should be factored before determining a bid. After subtracting repair costs, 80% of the resulting sum is an offer that usually is seriously considered. For example; if buying a home that should sell for $100,000 in good condition, needing $30,000 in repairs, determine what 80% of $70,000 is-that’s your offer. Buyers should  be firm with the maximum amount they are willing to spend. Going off track creates problems!

When writing the offer, agents should include several clauses. 1) The right of inspection which is a buyer’s protection , not to ask for repairs, but to uncover major issues that might make buying too costly. If too costly, the clause should give the right to withdraw from the deal without penalty. 2) Utilities be on for inspection, to facilitate evaluation of the furnace, H20 tank and electric system. 3) an exit clause, the offer dies if the appraisal comes in for significantly less than estimated value, especially if paying cash! Attorneys can make additional suggestions regarding protective clauses. It’s crucial to have a real estate attorney on the deal, not just the family lawyer. Foreclosure buys require professionals who are very familiar with foreclosure deals, to catch irregularities and to help protect buyers’ interests.  One legal area often over looked, is title insurance. Its recommended foreclosure buyers have their own title insurance policy. Banks always have a policy included in mortgage costs, but this doesn’t protect the buyer! There are two types, one for bank protection, the other for buyer protection. Attorneys should discuss the ins and outs of this topic thoroughly with their client, but will usually do so only when asked.

Lastly, a NYS licensed inspector should inspect the property. Agents should suggest several inspectors to choose from. They are a crucial member of the team in determining without bias, repair issues with a property. Additionally inspectors can help prevent further damage to a property, which could be acerbated by not being tended to immediately after buying. For example, broken pipes could lead to serious water damage!

A well-chosen team can make a good experience. It’s crucial to stress foreclosures, if not researched and handled properly, can cost time and money. Buyers must be educated and work with their team of experts to find the right property! Buyers should never “go it alone” unless very experienced with this market. Following the rules equals winning the foreclosure game!