Is now a good time to buy a foreclosure?

This is a very common question from both real estate professionals
and prospective buyers. Obviously, because local market conditions
vary, the answer is different from market to market. But there are
questions that buyers in any market should be asking before they make
an offer on a property in foreclosure.

What’s the first step buyers need to take?

Require buyers you work with to be preapproved for a loan before you
help them shop for a foreclosure. If they’re thinking of buying a
foreclosure as an investment or second home, they need to understand
that financing the home will be more difficult and more expensive than
financing a primary residence. Lenders typically charge higher interest
rates and require a larger down payment for investment or second homes.

How can you tell a bad foreclosure from a good one?

Certainly there are great deals in many markets for both investors
and buyers looking for a primary residence. But making a sound deal can
be tricky. Buyers need to be wary of unpaid liens, including mortgage
debt, taxes, construction loans, home equity lines of credit, and
possibly a second or third mortgage. Any or all of these financial
obligations could become your clients’ responsibility when they
purchase a property in foreclosure. Unless the property goes through a
foreclosure auction and becomes a bank-owned REO, the outstanding
foreclosure liens and fees could be simply transferred to the new
owner—your clients. Don’t let them fall into the same financial trap as
the previous owner.

If I’m a qualifying borrower, can I appeal to banks for better loan terms?

Lenders are drowning in defaults—particularly in hard-hit real
estate markets such as Arizona, California, Florida, Michigan, Nevada,
and Ohio—so they may be motivated to cut a deal. If your clients have a
good credit score, many banks will offer them a below-market-rate loan
on a bank-owned home. Unlike paying down with points, this doesn’t cost
anything in fees, and it gives them the ability to spend more for the

What are the costs of buying a foreclosure?

It takes money to make money. The best
opportunities are for buyers with cash. If your clients are planning to
rent out the property or even resell it for a quick profit, make sure
they consider the carrying costs, including sales commissions,
marketing costs, vacancies, taxes, insurance, and maintenance costs.
Once you’ve calculated all the expenses, add on another 10 percent to
15 percent. If they don’t build in a surprise fund, your clients
might be the next foreclosure statistic.

How does choice of neighborhood affect foreclosure investments?

Clients looking for a good investment should generally avoid
neighborhoods overrun with foreclosures, particularly newer
subdivisions in overbuilt exurban areas. Investors will be tempted to
buy foreclosures in these areas because they offer the steepest
discounts—but they also carry the most risk of further depreciation.
Look in well established neighborhoods with good schools and
transportation. If you’re in a market where prices are still falling,
encourage your clients to factor falling prices into any offer they
submit on a foreclosed property.

Source: James J. Saccacio is chief executive officer of RealtyTrac, a Web site that tracks properties in foreclosure.

Tip from a Top Producer: Be Frank with Sellers

I tell clients, Don’t be emotional about the sale. You want to sell
it. If you don’t price it where I recommend, don’t get mad at me or
move the listing if it’s not selling. Keep your home clean, free of
debris, and staged as well as you can. Don’t call me every day. I’ll
give you a weekly report of showings and feedback.

—Michael Weaster, Southwest Director, Century 21 Excel, Houston