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Dealing with the Foreclosure Market

By now, anyone who even remotely follows the real estate market knows that foreclosures have been a major part of daily real estate vernacular for years now, and that’s likely to remain the case for at least another year, maybe more. While it’s not great for sellers, it is great for buyers. The affordability index for buyers is the highest it’s been in years, and many who sat out the real estate gold rush of a few years ago are now taking advantage of the vast amount of short sales, foreclosures and just plain well-priced homes hitting the market.

How much wheeling and dealing is there to be done in the foreclosure market? Even in Beverly Hills, there were 12 homes sold in foreclosure in the last 12 months, according to the Multiple Listing Service. Although there are currently only three on the market there now, including one that’s been listed for months and months, currently at $8,595,000 (having been on the market at $16,950,000 in 2008), you can see that no area was left completely untouched by foreclosure.

My point is, by now every segment of the market has been affected by the foreclosure crisis, leaving plenty of openings for buyers of all price ranges to swoop in and make their move. But how exactly is buying a foreclosure different from a regular sale? What do you need to look out for and how do you protect yourself?

If I could give you one piece of advice, it would be to inspect that house like your life depends on it. In a standard sale, you have the benefit of a seller who knows the house backwards and forwards and ostensibly will be providing you disclosures with all types of useful information that will assist you in your decision whether to purchase the house. In a bank-owned home, though, no one who has any real knowledge of the property is involved in the sale. This makes it doubly important for you to do your due diligence. Beyond having a licensed and reputable general inspector, you will want to make sure you have sewer inspections, chimney inspections, and if necessary, anything else that applies, like pool, geological, mold, etc.

When you write your offer, make sure you give yourself sufficient time in which to complete your inspections. The house may look dandy, but what lurks underneath could cost you dearly if you don’t do your homework. Admittedly, there are foreclosures out there that are in great shape—some even having had spiff-up work done by the bank. But don’t rely on that. Most of the time, the home is being sold as-is, meaning no repairs, no credits. Make sure that the contract is written so that you have an out if you find the house to be in such disrepair that it’s more than you’re ready to take on.

Try to avoid being lured in by the temptation of “flipping” a house for a profit. Unless you are an experienced flipper, you might find yourself losing money. This is not the market for amateur flipping. That said, though, if you do buy a home that needs a significant amount of work, make sure you have the funds to do the work, even if it’s only enough to make the home livable at first. There are certain loan programs that can help you secure funds for rehabbing, such as a 203(k) loan, which is available to homebuyers who buy with an FHA loan (which requires only 3.5 percent down payment), allowing them to roll the cost of rehabbing into the loan.

Also, make sure you’re buying a home in a good area. Everyone knows the three most important things in real estate are location, location, location. Even at a foreclosure price, you may not be doing yourself any favors buying in an area that has depressed values due to crime or an extraordinarily undesirable location. Investigate crime reports online, drive the neighborhood at night, do your homework.

Finally, make absolute certain you obtain title insurance. With the recent robo-signing scandal, lots of homes were erroneously foreclosed on. The last thing you want to hear is that the previous owner of the home was wrongly foreclosed on. As long as the new owner has title insurance, the previous owner can’t seize the home.

As with most any home purchase, it’s best to get your financial house in order before you actually begin the search in earnest. Good deals don’t last (and you are looking for a good deal, right?), and it’s imperative that you be able to jump quickly. A delay of a couple of days while you wait around for a pre-approval letter can easily cost you the house.

While a given home may be selling for as much as 40-50 percent less than it did a few years ago, don’t expect “fire sales.” In some parts of the country, maybe. But real estate is a hyper-local market, and in Los Angeles, even foreclosures will sell for close to market value.

Jefferson Hendrick is an L.A.-based Realtor with Keller Williams. Contact him with questions, concerns and real estate inquiries at [email protected] or facebook.com/jeffersonhendrickrealtor.

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