The f-word has been making a lot of headlines. In early 2007, more foreclosed properties are on the market than in the last 10 years combined.
Five years ago, lending rates were low and people bought expensive homes they couldn’t afford. Homeowners with adjustable-rate mortgages cashed out equity to pay bills and raise their standard of living.
Now they’re paying for it. Balloon payments are due and over-their-heads borrowers can’t handle them, so their homes are being turned over to the lenders.
"Areas you never would have dreamed would be foreclosures are being slammed right now," says Darrell Gibbs, a South Carolina real estate broker who specializes in auctioning and selling foreclosed homes.
With a glut of potentially desirable property on the market at fire-sale prices, profit-minded entrepreneurs are jumping into “flipping” – buying houses to sell at a profit, either after they make improvements on the property or see them in the market.
The practice is loaded with risk, often ignored for much the same reason the property was foreclosed: eyes widened by a potential killing.
An Insider’s Advice on Buying a Foreclosed Home
New Hampshire investor Skip Stearns has been flipping foreclosed homes for 10 years. Even the house he lives in was a foreclosure.
Most such properties are sold at auction, usually as-is, without the bidder ever getting to walk inside. Stearns says exceptions happen with less than five percent of the houses he buys.
But, he adds, "there are ways you can learn a lot about a house without seeing the inside.”
Here are some of his “insider” tips:
Read the paper. Instead of using specialty lists of foreclosed homes, read a local newspaper that publishes notice of all the foreclosed homes in your area. Laws vary state-by-state, but commonly require that notice is published three times.
Don’t buy from brokers. Real estate dealers mark up the price of foreclosed properties to take their own cut.
Drive by. Even if you can’t get a look inside the foreclosed property, drive by and look it over. Foreclosure notices list the address. Is the lawn well kept? Are there pets on the property? Is the outside of the house in good shape?
Check out the neighborhood. No matter how good the house looks from the outside, you’re in for problems if it’s not in a marketable neighborhood. "No manner of rehab is going to make it salable if it's on the railroad tracks," Stearns says.
Visit your town hall. Look up the tax assessor's report on the property. It’s packed with details – when it was bought, how much it sold for, number of bedrooms and bathrooms, construction materials, if there's a finished basement – and the assessor’s rating of its general condition.
Check other debt. Be sure to look for any outstanding property taxes, condo fees, or water and sewer bills. Laws vary by state, but sometimes the buyer of a foreclosure has to pay those bills.
If it doesn’t sell at auction, follow through. The mid-18th century colonial Stearns lives in had been in foreclosure, the bank held an auction and the price was too high. So he quickly went to the bank and negotiated a lower price.
Work hard to make the best deal. The less you pay for a property, the more money you’ll have to fix it up, the less you’ll stress if it stays on the market a while, and it’ll be easier to take if you can’t sell it yourself and have to hire a broker and split the commission.
Leave room in your budget for pet damage. Stearns once bought a house that had had 10 cats living in it. When he couldn’t get the odor out, he ripped up a floor and found one wedged underneath.
Do the same for mold or water damage. If you haven’t been able to get inside the house, be ready for these repairs, too.