Foreclosed Houses Can Be a Steal

CNNMoney.com wrote a good article on buying REO (real estate owned, a term that means the property has been foreclosed on and the bank owns it, don't ask me why!) properties and short sales. More and more of the market is turning into distressed properties like that, so it is important to know what you are getting into before you make an offer, or heaven forbid, fall in love with a house.

I don't agree with everything CNNMoney.com advised, see the original here.

1. Don't get caught up in a feeding frenzy- Banks put repossessed homes back on the market at cut-rate prices because quick sales help avoid the expense of upkeep, such as property taxes, insurance, heat and electricity. Those lowball prices represent golden opportunities, but they also attract dozens of buyers who may bid until homes are no longer bargains. Don't get caught up in a bidding war. Instead, carefully calculate what you want to spend and do not exceed that price.

2. Have Your Realtor Contact lenders directly- Smart buyer's agents establish relations with asset managers at banks. This may reward them with inside information or first crack at new foreclosures hitting the market. In the case of a short sale, for example, it can give the inside edge. If a buyer is pursuing a short sale -- buying a home for less than what the current owner owes on the mortgage -- she should talk directly to the property's asset manager. That way, if the short sale falls through and the bank repossesses the house, the asset manager knows she is still interested. It could lead to a quick sale without other bidders.

3. Get pre-approved from the lender you want to buy from- If you're trying to buy a property from, say Bank of America, it can help to get a pre-approved mortgage from Bank of America. Doing so may cause lenders to look more favorably on your bid if it's similar to others. Plus, you're not locked in if other lenders offer you better terms. You can always change your mind and get your mortgage from another source.

4. Be Prepared for Fixers- Most REOs are sold as is. That can be problematic today because so many foreclosed homes are in less-than-mint conditions. Often, the former owners were struggling to pay their bills and may have neglected routine maintenance. Or, they may have trashed the properties before leavingIn 25% of cases, homebuyers persuade lenders to fix some of the problems before the sale closes. Most of the time, banks would rather sell the house to the next available bidder -- one who doesn't ask the bank to pay for repairs. So be willing to consider a home that needs some work -- but budget accordingly.

5. Hire a real estate attorney- Once banks agree to sales, they often want to move fast and load contracts up with legal mumbo jumbo. As a result, buyers often do not have the time or expertise to figure all the angles. The solution is to hire a real estate attorney -- even in states where home sales are usually completed without one. Considering you're making a six-figure investment, the legal fees are cheap insurance against the risks.

6. Wait to make an offer- Homebuyers may be well served to wait before making an offer. Let the house sit on the market for a few days, giving others a chance to set the bidding tone. Then jump in. Have your Realtor call or email the listing agent to see if they can find out what other offers are, and what that specific bank is looking for. Maybe they won't consider FHA financing, or they are already planning on budgeting for some work.

7. Get as Many Inspections as You Can- With so many REOs in seriously deficient shape, it's essential to go over every inch with someone who can spot problems and tell you how much it will cost to remedy them. A foundation crack can be a minor problem or a deal breaker, and most ordinary homebuyers have no way of telling the difference. Like an attorney, an inspector can be very worthwhile insurance.