The raging river of foreclosures and inventory of Fannie Mae HomePath properties that swelled in numbers never seen before until the great recession looks more like a swift stream of repossessions this year.
As a result, the deals you’re likely to find aren’t quite as compelling as they once were, but if you work with me, you can find the right foreclosed home and still get a bigger, and better house than you otherwise could afford, or create some instant equity.
About five million homes have gone through foreclosure in the half decade since the housing bubble burst, but the rate of foreclosures is falling in many areas around the country. The Mortgage Bankers Association reports the percentage of homes in foreclosure at the end of September was at 2.39 percent and the lowest since 2007.
The National Association of Realtors found that nine percent of existing home sales were foreclosures or short sales. That’s down from 14 percent in late 2013 and 24 percent in late 2012.
With fewer foreclosed houses available, there’s good evidence that institutional investors and property flippers are leaving the market, and the reality is it opens the door for average home buyers to get in on some great opportunities.
The slowdown of a purchasing frenzy created by institutional investors and property flippers means average home buyers aren’t likely to face as much competition and that’s really good news. It creates an opportunity for average home buyers who want something a little large that they might be able to afford otherwise or an opportunity to create a little instant equity, but that takes an experienced team, which includes Stephen, a mortgage lender and even a general contractor or several great home improvement vendors here on Oahu for most home buyers to accomplish their goals.
Whether you’re interested in buying a foreclosure as a primary residence or to rent out, you don’t just want a cheap property, a savvy home buyer wants to create good value. The way to do that is:
- Purchase a home at a discounted value that Fannie Mae HomePath can supply;
- Qualifying for a low-interest rate/low down payment mortgage with renovation options included, like the FHA 203K and Fannie Mae HomeStyle mortgage loans;
- And employ a lender approved FHA 203K experienced general contractor or some local home improvement vendors, who can get the work done on time and on budget.
If you’re serious about buying a great home and creating a little instant equity between signing a purchase agreement and moving in considering these options.
- Never buy a foreclosure sight unseen and employ Stephen to research the home equity potential by completing a CMA.
When you buy a repossessed home at auction, you usually can’t enter the property to assess its condition before you bid. At best, you might be able to view the exterior, peek in the windows and talk to a neighbor about the property’s history.
Without going inside and without an inspection, you won’t know what shape the home is in until you get the keys. At that point, any unexpected costs are yours and let’s face, it’s not a good way for the average home buyer to purchase a home.
Attempting to purchase this way also requires you have cash and you’ll still be competing against institutional investors and property flippers who are still milling around looking for the very best deals. Frankly, it’s a waste of time when you can employ Stephen to locate properties you can inspect and make sound decisions, while financing the purchase and renovation with just a 3.5 or 5.0 percent down payment.
Many times the previous home owner of a foreclosed home became frustrated facing eviction and has destroyed the plumbing; electrical systems; ripped out carpeting; punched holes in walls; stripped homes of kitchen appliances and even removed toilets to the hot water heaters.
All that may sound awful to you, but it’s really nothing more than an advance demolition if you think about it. When you’re looking at a distressed home, you’re looking at it bones and location, not that it’s missing a toilet or appliances you’d most like would have wanted to replace anyways.
- Never attempt to buy repossessed homes without a real estate agent.
First of all Fannie Mae HomePath won’t work with a home buyer without being represented by a licensed real estate agent. Fannie Mae depends on the expertise of a real estate agent and only accepts offers through their real estate listing agents.
When the home goes to auction and no one bids, or no one bids enough to cover the outstanding mortgage, the bank that holds the loan gets a title and if the mortgage had originally a Fannie Mae mortgage ownership is transferred to Fannie Mae’s HomePath division. These homes become known as real-estate owned (REO) properties.
Fannie Mae will usually repair the worst damage and hire a real estate agent who specializes in foreclosures to market local properties for the agency. That selling agent can provide access to see what’s inside, so that you know exactly what you’re buying.
Once you’ve found a home that you’re interested in, you may need to consult with a general contractor and provide a bid for obvious repairs, while including several renovations that would give you the best future resale value that only an experienced real estate agent can provide.
Now, you can determine how much to offer and whether or not any equity creation can be created or get the home of your dreams without breaking the bank.
The main reason home buyers think they should shop for a foreclosure is to get a bargain and that isn’t always valid. In the past, foreclosure home buyers would take what they think is a fair price for a similar, but well-maintained home, subtract the cost of repairs and offer 80 percent of that amount.
Back then, the market had a glut of foreclosed properties, but that’s not the case everywhere, like it was. Stephen can advise you about local market conditions and the ratio of foreclosed homes to determine if including distress home view is a viable option or not.
The discounts aren’t as steep as they were a few years ago, but property values have stabilized, risk has been reduced with the stabilization of housing, but often enough good deals are still out there if you’re working with a real estate agent that knows how to find them.
The National Association of Realtors reports that foreclosed properties sold for an average of 15 percent below market value in October. In hot markets, “if the home is in a desirable location, you will have multiple bidders and the home will sell at or near market value.
But you can still take advantage of a few things working in your favor:
- Fannie Mae HomePath has no emotional attachment to the home;
- They don’t have irrational expectations about price;
- And, Fannie Mae is losing money every day the house stays on their books.
Remember, the home’s real cost is the money you pay the seller, plus what you’ll spend on repairs and renovations. Set a firm maximum price that’s within your budget and near the property’s actual value. Be prepared to walk away if Fannie Mae won’t accept it. When coming up with a purchase offer build in a cushion of at least 10 percent above your general contractors bid for repairs to cover any changes.
- Understand what it will cost to make the home livable.
Fannie Mae REO’s more often than not are merely houses that have sat empty and neglected for months, with dead lawns, peeling paint and other relatively minor problems.
However, overlooked issues can turn a great start into a nightmare. For $300 to $600, a home inspector can help you spot all a home’s problems. A home inspection is important with any home purchase, but especially with foreclosures. The American Society of Home Inspectors or the National Association of Home Inspectors can help you find a qualified inspector in your area.
You can make your offer contingent upon a satisfactory inspection and if any unnoticed repairs are needed, have your general contractor update their bid and figure out if the offer still works.
Make sure your offer includes a “subject to” clause that lets you out of the deal, in case the appraisal your lender orders comes in low. When you use FHA 203K to complete your renovations, your appraisal will include both an “as is’ and “after repairs” value. If your offer to purchase was done right, you should be pleased with the after improved value you and Stephen originally established as a goal to achieve.
- Know what similar homes are selling for.
Stephen can find “comps” for the property you’re considering. You’ll get actual sales prices for similar, nearby properties that have sold recently, not asking prices or the unreliable estimated values that Zillow creates based on real estate records.
You won’t always be able to tell the condition of the homes that recently changed hands — though sometimes listing photos are still available and can give you an idea, but you’ll be able to establish a range of prices, a typical price per square foot and an average price.
Eliminate any comps with extremely low prices. These may be transactions between family members that don’t reflect market value or other influences that simply aren’t reflective of overall values.
- How much house can you afford?
You don’t want to drain your savings by taking on mortgage payments you can barely afford. With any home purchase, it’s important to know what you can afford before you start shopping. If you’ll be using a mortgage to pay for the home, having financing lined up is one of the best ways to prove to Fannie Mae you’re a serious home buyer and increases your chances of having your offer accepted.
When you’re buying a foreclosure, taking this step is not optional. Get pre-approved before going to look at any foreclosure and have earnest money ready. Have a credit approval letter from your lender in hand. Almost all REO listing agents require this information when making an offer.
Taking these steps will put you ahead of the pack, if other bidders are less prepared. And if you’re up against cash buyers and you’re using financing, being able to prove you can close is your only shot at a winning bid.
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