How do you buy foreclosed houses?

[Balog]

So our lease here is up in about 4 months and we're hoping to be able to step up from renting to buying a small house. Lots of obvious reasons, and I absolutely loathe the idea of strangers having keys to my house.

However, real estate is super crazy expensive in W. WA. I'm talking anything under $300K is probably some type of trailer, even fairly far into the boonies. And I refuse to get an ARM or more house than we can afford; that's why so many people are getting their asses foreclosed on.

Which leads me to the point of this post; buying houses that've been foreclosed on. I used to consider this a bad risk, with the assumption being that if you let your house get taken it was probably a crap shack by the time you left. However, given the whole sub-prime fiasco it seems more likely that I could get a decent small house for under market value (ie I could afford it). I understand I would most likely need to invest some of that fabled "sweat equity" and do a bit of work to make it nice, but I'm ok with that.

But how? I'm always seeing ads like "10,000 square foot, 8 bed 6 bath houses starting at $50K! Call for listings!" etc etc. Right next to the "Foreclosed BMW's starting at $500!" ones, generally. I assume these are scams, but I don't really know.

So do I just ask my buddy who's a mortgage broker to hook me up with a RE agent, or is there a legit way to check this out for myself?

[Paddy]

Google REO's for more information.

[Balog]

Google REO's for more information.

REO that wasn't very helpful.

[Paddy]

Not REO, REO's

[Balog]

Yeah I know, I was just messing with ya.

This page seems to be a decent overview of what they are. So do I just go through an RE?

Where's Brad Johnson when you need him?

[Paddy]

So do I just go through an RE?

That was going to be my next suggestion.  Find a big national Real Estate office in your town and ask to speak with the REO specialist.  Chances are they have at least one agent handling REO's fulltime. 

[Balog]

http://www.thecreativeinvestor.com/Web_Links120.html

Has a list of websites listing REO's. Interesting, but should I be concerned that it seems to be considered more of an "investment" thing than a "normal house" thing?

[Paddy]

http://www.thecreativeinvestor.com/Web_Links120.html

Has a list of websites listing REO's. Interesting, but should I be concerned that it seems to be considered more of an "investment" thing than a "normal house" thing?

Yes, real estate is always speculative.  That said, however, residential rental real estate is the way to go, if the terms are right for you.

[Bogie]

Just be prepared to hear the words "total gut" more often than not...
 
1) The day laborers down at the corner in the bad part of town are a good source of manpower for the grunt work. They also tend to not be all that bright, and if you announce that you'll buy everyone a case a beer if you get a job finished +that day+ they'll hustle, not thinking that they _could_ stretch the job out for 3-4 days... Thing is, they're generally not technically proficient beyond crowbar and fire axe levels, and require constant supervision.
 
2) When you get it down to the base floors and studs, you do your _real_evaluation, and then budget higher, because you'll find stuff that you didn't see with the meat still on bones. Fix that stuff.

3) The building inspector is your friend. Keep notes, and make sure everything is fixed, or at least in the process of being fixed every time he comes around. Ask if you can video, so that you will be sure to catch everything.

4) It doesn't cost a lot more, material-wise, to upgrade a lot of things. Always make sure you've got your signoffs before proceeding. I hate tearing out fresh drywall.

5) You can get your permits, etc., without stuff like kitchen cabinets, etc... That stuff goes in second to last... The floor, doors, etc., goes in last.
 

[ilbob]

There is a lot of competition to buy cheap houses and turn them quickly. That tends to lift the market price of those properties.

If you are trying to turn a buck, it is possible, but it is a substantial amount of effort.

And often there are non-obvious reasons why some properties are so "cheap" that you do not find out about until it is too late.

Do your homework. Never trust the opinion of a home inspector. They are usually either not all that knowledgeable at all, or only knowledgeable in one area. They are especially bad with electrical issues. They are pretty good at finding the obvious problems though you could probably get the same checklists they use and look for those problems yourself. Digging around in the attic and crawl space yourself may well give you some insight to the property that is well worth the time spend there.

Building inspectors are NOT your friend. They are not your enemy either. They usually come by for a few minutes and if they see nothing obvious they sign the tag. Don't give them anything obvious. They also tend to spend more time looking if things are messy, even if they are to code.

[Brad Johnson]

Where's Brad Johnson when you need him?

You rang? 

Foreclosed properties aren't necessarily the golden egg they are made out to be.  In fact, if you find a local bank actually holding a mortgage in-house it will be an exception.  Most banks nowadays sell their mortgages immediately on closing to any of a number of large national underwriters.  Trust those folks to have an agents (or, more likely, an entire brokerage) that handles the foreclosed properties in your area.  If it is a HUD or VA foreclosure, those homes are usually listed on the web site for the HUD/VA entity in your region.  It's called Southwest Alliance for the Texas/New Mexico area.  Maybe you can start on their web site and backtrack your way into the web site that services your region.

If a bank truly is holding a note then, sure, they will want their money.  But they aren't going to just give the property away.  Chances are they have a local real estate agent that does some legwork for them and establishes a reasonable market value for the home.  They they knock off a tidbit to make the house as appealing as possible.  Also, chances are very good that the real estate investor clubs in your area already have regular contact with each and every bank in town. 

Tax foreclosures.  Well... maybe.  The insider angle is less of an issue with tax sales.  You show up at the appointed place and time, money in hand, and put in your bid.  You better have your fincancing already arranged because the city/county will expect to be paid in full.  Immediately.  No exceptions.  Don't worry about the house "passing inspection" because you buy it as-is.

If you already have an established relationship with a banker, let them recommend a local real estate agent.  Interview the agent and see if you are comfortable with them.  Or, if you're not comfortable getting quite that involved yet, chances are there are several local real estate brokers with good web pages that are more current than the national ones like Realtor.com or Yahoo Real Estate (which can be as much as two weeks out of date).  Cruise the local pages and see if one of the search engines really stands out.  Use it.

And, for goodness sake, get your money situation in order first.  This is doubly important after the recent mortgage market fiasco.  The credit score requirements and debt-to-income restrictions haven't changed appreciably, but the requirements for supporting documentation and properly submitting applications have gone through the roof.  Expect to be questioned on everything.  Make sure you get a full-blown pre-APPROVAL and not some jickey pre-qualification. A pre-qual is someone taking your stated financial information and putting a calculator to it.  I could do it for you over the phone.  An approval means your information and all supporting documentation has been submitted and approved by a mortgage underwriter.  It is a morgage in search of a house.

Step number one is an absolute ... money, and getting it arranged.  You may be comfortable with a particular payment.  What matters is if the mortgage company is willing to make you the loan.  Until you have the mortgage situation nailed down everything else is irrelevent.  Once you have the money squared away, figure out how much house you can purchase with the funds at your disposal.  Then search that price range diligently.  Do NOT make the mistake of upping your price range "just a little" thinking that everyone is going to bargain down.  It sets unrealistic expectations by having you wanting houses you can't (in all probability) negotiate your way into.  Look at the price range you know you can afford, and no higher.  In the end you will be much more satisfied with your home.  If homes in your chosen price range don't seem to be the kind of house you expected for the money, then you have two choices - raise your price or lower your expectations.

Finally, don't panic.  Buying a house is easy.  It's getting yourself in the right frame of mind, maintaining patience, and keeping an open mind that's hard.  You will have to jump through hoops.  But they are nice, round hoops of a known size.  You will run into some issues along the way.  But, chances are, they are the kind of issues that common sense, neighborly goodwill, and some reasonable comprimise can overcome.  Most of all, keep your wits about you and realize that it's a big game of hurry up and wait.

Brad

[BrokenPaw]

You better have your fincancing already arranged because the city/county will expect to be paid in full.  Immediately.  No exceptions.

Brad,

How immediately is immediately?  As in, do you have to have a cashier's check in hand when you make the bid (and if so, and you lose, do you take the check back to your bank and they invalidate it and give you your balance back)?  Or are you supposed to write them a personal check with many zeros in it?  American Express Unobtanium Card? 

How is that part supposed to work?

-BP

[Brad Johnson]

How is that part supposed to work?

Immediately as in a day or two (usually).  Some will want the payment in full at the time of the sale.  Many will want a minimum deposit on the day of sale, with full payment within, say, two to three business days.

Whether or not you can get a conventional morgage on a tax foreclosure depends entirely on your lender.  You might be able to find a lender that will do some kind of interim deal to let you purchase the house and do any repairs or remediation needed for it to qualify under some kind of more conventional mortgage product.  A good example would be a lender that makes you a 30-day interim note so you can close the house, replace the roof, and fix the HVAC system.  Then, in 30 days, you close on the mortgage and wipe out the interim financing.

If you're going to get something at a tax auction, do your homework.  Contact the selling entity and see what their term are, then contact your lender and see if there is a workaround.

Brad

[Hawkmoon]

Typically, you don't buy foreclosures through real estate agents. You spend all your free time reading the legal notices in the back of the newspaper, where they publish the sheriff's auctions, and the rest of your free time driving around to inspect the houses that are announced for auction.

Usually there's an inspection period of one to three hours immediately prior to the auction. You can drive by and look before then, but that's when you actually get to go inside.

There are more rules, involving cash depsits and so forth, but I assume they vary with jurisdiction and I'm not even up to speed for where I live, so you'll just have to do some homework. Most of the auctions (maybe all) have an attorney or a law firm appointed by the court to handle the auction, and their phone number will be listed in the legal notice. Call them if you see one you like, and they can give you the specifics.

[Hawkmoon]

Building inspectors are NOT your friend. They are not your enemy either. They usually come by for a few minutes and if they see nothing obvious they sign the tag. Don't give them anything obvious. They also tend to spend more time looking if things are messy, even if they are to code.

Very true.

Since I work part-time as a building inspector, I can say with a modicum of "authority" (pardon the expression) that a building inspector doesn't want to be your friend or your enemy. He wants to ensure that whatever work you are doing (or having done) complies with the code. If you're doing work and don't know what the code requires -- shame on you. It is NOT the building inspector's job to spend half a day teaching you what the requirements are. In a busy jurisdiction, each inspector may have a dozen or more inspections to perform daily, plus he has to get from each to the next, plus he has to get back to the office in time to write them all up and submit the paperwork. If you don't know what you're doing, his job is to tell you you failed. Period.

If we have time and if you're not a total jerk, we'll usually try to be bit more informative than "Sorry, call us when it's fixed." But we don't always have time. And we also can't provide advice regarding either design issues or material selection issues, because then we incur personal liability (as well as making the city/town/county liable) if we tell you something that goes bad. The building inspector's job is to enforce the building code, not to be your general contractor and your architect.

As my state's head building inspector puts it, "The building code is the minimum you can accept and the maximum you can enforce." That means we CANNOT legally "give you a break," and at the same time we can't legally (although I know damned well it still happens) say "I know the code only requires 'X' but in MY town we do it this way."

All of which is begging the issue. If you're buying a foreclosure property, you should be buying it at the auction. If you're not, then you're buying it from someone who did, and that means you're already paying his profit to "flip" the property. When you go to the pre-auction inspection, you have to know what you're doing. If you aren't handy, find a friend who knows construction and take him along. The building inspector is NOT going to be there telling you what meets code and what doesn't, or what's okay and what will need to be replaced, rebuilt, or just refinished. I respectfully suggest the Bogie's advice above isn't really helpful. He is correct that a really bad property may require a total gut (tearing out everything except what holds up the roof). But if you have already bought the property and started gutting it before you start adding up the costs ... you're in over your head.

You have to go to an auction sale knowing what you can afford to spend. Then you go through the house and decide how much of that amount is going to have to be spent on fix-up. Subtract that from your bottom line. What's left is the maximum you can bid for the property. (Don't forget closing costs, if applicable.) Don't give in to the temptation to bid "just a little more," because the fact is ... whatever you estimate it's going to cost you to fix it, the actual cost is going to be 50 percent higher. Once you start working you'll find things you missed, or the inspector will find things that have to be done to meet code that you didn't figure on, or you'll decide on some upgrades and better quality than you originally estimated ... there's no end to the ways construction costs escalate once you get into it. So know your bottom line, and don't bid a penny more. There will always be another auction the following Saturday.

[thebaldguy]

I've seen local ads for forclosure auctions:

http://www.ushomeauction.com/

Some can be in very tough shape. I remember seeing HUD homes for sale years ago; a duplex for only $10000.00 that was vandalized, boarded up and stripped. I would have cost $50000.00+ to make it livable in a really bad neighborhood. You'd never get your money back. 

You won't find a decent house for pennies on the dollar like the ads claim.

On the other hand, there are deals out there. I knew someone who bought a nice lake home at a nice price when it was forclosed on. They happened to have the money/financing ready to go. Get your money together, get preapproved, and start hunting.

[cassandra and sara's daddy]

in my town 50m bucks buys a consultation inspectiob  building inspector looks it over gives good clues as to what needs to be done  on older homes 50 bucks well spent
i try to keep expectations reasonable. i bought current shack for 123k  hud foreclosure  8 years ago  when i moved in it was appraised at 149   currently 349  i've done flips where we made a ton  but it always took a lotta cash/work.

[Bogie]

In St. Louis, there are a LOT of "buy the bones" houses... Or there used to be...

Basically, you removed the interior, put a new roof on it, new plumbing, new electric, and tuckpointed the brick exterior (which sometimes doubled as load-bearing...).
 
Sometimes it's cheaper to tear out the crap that's there, and replace it all... If you've got good bones, drywall, romex and PVC are cheap. It's professional help that is expensive.

You _will_ find stuff that you won't before you start. Sometimes it's fairly involved (i.e., one time we had to do a new sewer line _and_ a new line to the street for incoming - Did the "street" line on a weekend, and the end of the street had a "water outage" for about a half an hour while our guerrilla plumber dry-iced the line, did his thing, and let it thaw - I didn't say you had to be that friendly with the inspector...). If you get down to the basement, and you find out that the line from the stack to the sewer has decided to give up the ghost, well, that's gotta be fixed. In our case, we jackhammered the whole basement floor while we were at it, and cleaned it up a bit... The augur to the street was a bit more interesting, but we hit that sucker on the first try.
 

 
With a lot of stuff, you basically just need bodies to move things. Drywall is heavy. Drywall compound is heavy.

[Sylvilagus Aquaticus]

A couple of years ago SWMBO and I bought the house we're in now. It wasn't our first choice, but it's in a great neighborhood, has more square footage than we'd been looking for, and had been vacant nearly 2 years. It was repoed by one of the national banks about then and had 20 years of 'deferred maintenance'. Granted, it was a custom home when it was built, but it was very 1986. Didn't bother us much, though. Paint is cheap. We have replaced both the HVAC units, including furnaces and compressors (8 tons total) in the first year and I redid the breaker panel, which was 'quaint', as the breakers were previously inhabited by mediterranean geckoes who learned the difficult lessons about Ohm's Law.  Our agents had it 'down the list' as far as things to show us, as it didn't really 'need' a lot (aside from the HVAC, which was working at the time of inspection- and a whole story about home warranties comes with that another time) aside from the old but perfectly serviceable carpet, dated kitchen, and dead yard.

It just didn't have a lot of curb appeal.

Of course, we walked into about 50K of instant equity at closing, compared to the neighborhood comparables, and the house is 1100 sq. ft. more than the tax district thinks it is.  Even with the slight slowing of the market, we're still doing fine, and we found an acorn on the ground.

Your mileage is guaranteed to vary.

Now, I've bought rental houses in the past- rather, houses that were in an estate or foreclosed when the oil boom went to bust, threw some paint on them, fixed leaky roofs, replaced a water heater and the like, and turned around and rented them for more than the payment. Of course, I've sold them all since then, but when it was good, it was very good. I knew bankers and lived in a small town at the time, so I got leads on what was coming up. 

Cultivate your leads with real estate agents, local bankers, even the lawyers. You might turn something up.

Regards,
Rabbit.

[cassandra and sara's daddy]

don't forget preachers as sources of leads. they know a lot of the family politics  who died and whose kids wanna sell the old home place

[Hawkmoon]

in my town 50m bucks buys a consultation inspectiob  building inspector looks it over gives good clues as to what needs to be done  on older homes 50 bucks well spent

Terminology.

That's not a "building inspector," that's a "home inspector." Most lenders won't issue a mortgage without a satisfactory report from a home inspector. In many states (mine included) home inspectors must be licensed by or registered with the state.

"Building inspectors" work for the town/city/state and aren't supposed to undertake private "consulting" inspections because doing so is a conflict of interest. I am licensed by my state and employed by a municipality as a "building inspector."

I also happen to be licensed as an architect and that legally allows me to perform home inspections, but I prefer not to ... and I will never do one in the municipality where I work as a building inspector, nor will I take architectural work in that jurisdiction.

[cassandra and sara's daddy]

actually in my town you pay 50 bucks and the city inspector comes out and gives ya a heads up  on what will be expected. they have the strange idea that there purpose is to expedite proper work as opposed to geberate and adversarial situation.its one of the reasons i like living here.  and since we have many 100 and 200 year old places its real helpful. they are so helpful that when i call to extend the dates on the no parking permits i got to put scaffold in the street (3 bucks) the lady said take a magic marker and change the dates.  the contrasr between here and dc where i sometimes do work is quite remarkable

[Brad Johnson]

Most lenders won't issue a mortgage without a satisfactory report from a home inspector. In many states (mine included) home inspectors must be licensed by or registered with the state.

Yes on the second, no on the first (depending on your state's regs).  Lenders won't issue a mortgage without an appraisal, which includes certain functional/structural conditions as part of the criteria (exterior paint and roofing is a biggy).  Inspections in the traditional sense are usually left up to the buyer.

In some places, the city, county, or state residency codes require an occupancy certificate for each new owner.  I think that's what cassandrasdaddy is talking about.  Call it a "city inspection" or somesuch, but it's usually a local thing to make sure the structure is habitable and safe.

Brad

[Hawkmoon]

actually in my town you pay 50 bucks and the city inspector comes out and gives ya a heads up  on what will be expected.

It's fascinating how laws differ from place to place. Here, by State law, the building inspector has NO jurisdiction unless there is an open/active building permit in the process of being constructed. And we are not allowed to provide any advice as to what "might" be needed before someone takes out a permit. By statute, our job is to inspect what has been built, and to reject it if it doesn't meet code. If we go much beyond that, we can get ourselves and the municipality for which we work sued.

Heck, we even get sued when we do it right. My jurisdiction is in a lawsuit now, filed by a guy who illegally converted an office space to a tavern without either zoning or building department approvals or permits, did all the construction without bothering to take out a building permit, and then sued the municipality when we declined to give him a certificate of occupancy confirming that everything complied with all applicable laws, codes, statutes and regulations.

 

[Scout26]

 Balog,

As a Veteran you can get a VA loan (basically a 30 year fixed rate).  Avoids that whole "down payment" thing, you'll still need earnest money and cash at closing, but leaves more $$$$ in your pocket for repairs, and can easily be converted to a conventional 30 year fixed.  It's how we did our first mortgage on our house when I got out back in '91.  When rates dropped we converted to a conventional loan, but we still get junk mail about how we should convert our VA loan....

Anyhoo, something to consider.......     

Another thing to look at are tax sale properties, but you best bet (if your looking to live there) is to figure what you want in your house (# of bedrooms, Fireplace, Attached garage, which School District, etc) and then get a Real Estate agent to find houses that meet your requirements and price range.

Also check with USAA (if you're a member, if you're not, become one), about home buying they have good info and can help with the financing part.