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Buying a Foreclosed Home Is Risky, Avoid These Mistakes

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The housing market has been improving over the last year, but homebuyers still need to be careful when purchasing a property that is in foreclosure.

Foreclosures are a hot topic, and while you may feel like they are a good buy, there are some things to avoid so that you can be satisfied with your home.

It’s always a good idea to be prepared, but buyers need to do their homework before making an offer on a foreclosed home they are interested in.

First-time and experienced home buyers alike often make mistakes when choosing properties in foreclosure by forgetting key details or rushing into deals too quickly.

https://www.wisebread.com/7-things-you-should-know-before-buying-a-foreclosed-home

Buying a foreclosed home can be a smart, real estate investment. However, there are plenty of pitfalls that can turn your property search into a disaster.

Below are 5 Things to Avoid when you’re looking for foreclosure homes:

  1. Timing Issues
  2. Hidden Costs
  3. Property Maintenance
  4. The Buying Process
  5. Additional Risks

During a foreclosure, you have a great opportunity to get a home for the cheapest price possible.

However, some people fall prey to later buyers’ scams and other foreclosure red flags when buying a foreclosed property. If you want to avoid getting involved in similar scams and find a great opportunity that will help you save money, then keep reading.

What Does It Mean to Buy a Foreclosed Home?

Foreclosed homes are part of an inventory of properties owned by banks and other mortgage lenders. This lender inventory is often called the “REO” or Real Estate Owned inventory.

When you purchase a foreclosed home, it means the house has been taken through an auction by a bank or other lender.

They might have lost patience waiting for the owner to pay back some of what they owe and decided to sell it at a loss. Or, they might be stuck with a property that is worth less than what they lent on it and get nothing if there is no buyer.

People who want to buy foreclosed homes must act quickly. Banks that own foreclosures typically sell at a discount, and they quickly sell off inventory.

If you find just the right property at a great price, it might be gone before you know it.

So What Do You Need to Look out for?

1. Timing

Because a foreclosure doesn’t sell the property directly, more paperwork is involved. Each step in the process requires additional documents and signatures.

The mortgage documents must be reviewed, signed, and delivered.

Work with your attorney to set a closing date and then work with your real estate agent and the seller’s agent or broker to coordinate the closing date with other contingencies.

2. Hidden Costs

Foreclosure and real estate professionals call these homes “distressed sales.” And the prospect of buying distressed property gives many people a chill.

These days, scores of would-be homeowners are frightened away by the prospect of having to contend with a foreclosure time bomb. For example, this scenario here…

The property you seek could have substantial hidden costs that can result in tens of thousands of dollars of expenses─and those costs could be coming out of your pocket.

The problem originally stems from a lack of transparency on the part of banks and other lenders as well as real estate professionals who aid them in selling foreclosed homes.

The reason for buying a foreclosure property is to save money and make the investment viable. This will not happen unless there are repairs done and they are done professionally.

3. Maintenance of the Property

If you’re thinking of purchasing a foreclosed property, you must consider the potential for problems during any property inspection and thereafter.

When you make an offer on a home that’s in dire need of repair, you’re going to want to know what the maintenance will cost.

Bigger issues, such as structural integrity, can usually be discerned from a home inspection. Smaller concerns will only be revealed upon close inspection and living at the property.

You can avoid costly maintenance problems by:

  • Using a professional home inspector before you buy it.
  • Measuring and inspecting for asbestos or other toxins.
  • Making sure the property has no water damage.
  • Finding out whether mold is present in the home might cause future health problems.

When buying a foreclosed home, finding out the condition of structures and systems like the roof, plumbing, electrical, and heating/cooling system is critical.

I will help you navigate through these conditions to identify if they are repairable or not and help you discover the true value of this home.

4. The Buying Process

By definition, foreclosed properties are discounted because they are bank-owned. A foreclosure home purchase can also involve some hiccups.

All of the hassle and stress that go along with buying a foreclosed home can be frightening, especially if you are the one who has to do all of the paperwork.

Purchasing a foreclosure can also be somewhat risky.

There is no title insurance in the process, and the last owners may have left unpaid debts that you could inherit. On top of that, the foreclosure process is long and complicated

One of the biggest roadblocks that you may run into when it comes to buying a foreclosed property is that the seller may not be willing to transfer ownership to you.

When this happens, it’s called a title defect.

The seller won’t be willing to transfer ownership if the previous owner defaulted on their payments, and didn’t pay off the balance due.

If you’re lucky, they may have an escrow mechanism in their probate documents allowing them to hold onto a percentage of the sale as payment toward what’s left on the mortgage.

5. Additional Risks

Foreclosures allows you to make an offer on a home at its current market value.

Because the sale is non-contingent, you won’t have to compete with other buyers and can enjoy some peace of mind that there are no strings attached.

https://www.zillow.com/foreclosures/buyer/mistakes-to-avoid-when-buying-a-foreclosure/

A property can also come with liens (or unpaid bills relating to the property), code violations, or title issues. You need to research the property thoroughly before making an offer and make sure the seller’s disclosure is in order.

To avoid surprises, it’s important to consider the purchase price alone is just part of the overall cost of buying a house.

Factor in closing costs (the fees associated with transferring or recording property ownership), mortgage interest, property taxes, ongoing maintenance costs, and any liens or unpaid bills associated with the property.

Image credit: Scott Webb

We Did A Short Sale Of Our Home

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Howdy from the North Carolina mountains y’all.

Picking up and moving everything

Betsy and I recently picked up and moved everything from Lansing, MI to Hendersonville, NC (just south of Asheville). We moved for a lot of reasons including but not limited to:

  • great location for the local food movement
  • living amongst the Appalachian Mountains
  • warmer weather.

We haven’t been very vocal about this on DFA because for the previous 6 months we had been in the middle of a short sale of our home in Michigan. While in the process I did not want to talk about it publicly but now that it has completed successfully I can share the details.

A short sale of our home

You may have an opinion on short sales, I had one opinion before the process and a different opinion after going through it.

First let’s define a short sale for what it is: basically you sell your home/property for an amount less than what is owed on the mortgage(s). It’s really as simple as that. Short sales do not lower the property value of your neighbors because, unlike a foreclosure, it sells at market value.

In a short sale the bank holding the mortgage is the seller and thusly pays all realtor fees (buyer and seller). In a normal sale we would be the seller and would be responsible for paying the realtor fees.

I won’t get into the numerical details of the sale but suffice to say we sold the home for $50,000 less than what we originally paid for it nearly 5 years earlier. While living in the home we also did quite a few improvements including:

  • 60 yards of topsoil and a lawn installed throughout the lot
  • landscaping throughout the lot
  • a 350 sq. ft. paver patio off the sliding glass door
  • painting several rooms
  • all warranty work done throughout home before expiration (nail pops, etc.).

Though we sold the home for $50k less than the purchase price, when considering the improvements $65k is a more accurate assessment of equity lost over the 5 years we lived there.

Financial hardship

Before we go any further I wanted to clarify that to be considered for a short sale you have to be able to prove “financial hardship” to your lender(s). Betsy and I both went through job changes and were making much less than when we purchased the house so showing hardship was as simple as handing over our financials to our lenders. After looking them over both banks approved the transaction.

In short, you can’t just do a short sale because you want to, you have to be unable to afford your mortgage going forward. Be honest with the banks and avoid trying to pull any wool over their eyes; honesty is always the best policy.

Who should pay for the loss?

This is where it gets sticky for some people, but not for me.

Minus what we owed on the mortgages, we lost around $25,000 in equity. As mentioned above, in a conventional sale we would pay realtor fees (an approximate $14,000) in addition to our equity loss, putting the total loss around $39,000. Because the bank paid the realtor fees we were able to close with simply our equity loss and thankfully didn’t have to bring any money to closing.

Should the bank have to eat the rest of the loss, or should we have eaten it? That is the question. I used to believe we should, because we signed on for the debt. However, the errant lending practices of the banks had a lot to do with the market bubble and crash. Had they kept lending practices conservative the bubble never would have formed or popped. That makes them half responsible for all losses. We lost in equity, and they lost on the investment.

It’s important to note… because of the interest we paid over the nearly 5 years while living in the home, our first mortgage company still came out ahead on their investment. It is the 2nd mortgage (and lien) holder who ate the loss. They understood the elevated risk going in and charged a higher interest rate accordingly.

At the end of the day we shared in the loss with the 2nd mortgage company, and I believe that is the proper outcome. We both played a part in the transaction so we are both partially responsible for the losses.

You may feel different, which is fine; that’s one of the great things about living in a free country.

What about our credit score?

As I see it, your credit score is the only negative part of a short sale, but it doesn’t have nearly the negative impact you might think.

Before the short sale my credit score was around 790, which is considered excellent. After the short sale it went down to around 705, which is still considered good.

Here’s the kicker: the credit score went down because of missed mortgage payments, not because of the short sale.

Note: most banks will not consider you eligible for a short sale unless your mortgage is at least 30 days past due.

We’re not overly concerned about our credit scores – which are both still quite good – because we don’t plan to borrow money again and they’re plenty high to keep all insurance premiums low.

What about taxes on the forgiven debt?

It is the Mortgage Forgiveness Debt Relief Act of 2007 that provides tax relief for forgiven debt on mortgages of principle residence from 2007 through 2012.

As long as the home you’re selling is your principle residence, it does not count as income for tax purposes.

Where are we now?

After selling we decided against taking on the burden of another mortgage and are renting in our new location of Hendersonville, NC. Yes it’s a great time to buy, but taking on another long-term debt isn’t something we’re ready to jump back into right away. The plan is to rent for the near future and adapt as time and circumstances allow.

We’re both self-employed now running Debt Free Adventure, diy Natural, and writing books.

The only debt we have left is our student loans which you can see and track in the right sidebar. We’re planning to accelerate payments and pay them off within the next 3-5 years.

We have 3 months expenses saved for personal emergencies and are bringing in enough to cover our personal budget, business budget, fund our debt snowball, and build a modest savings.

We’re much happier working in our passions full-time and do not regret the decisions we have made, rather we’re quite satisfied with them.

A few more thoughts

Before the short sale we were hesitant to get involved in the procedure. It was unknown to us and we had heard a lot of negativity in relation to the process. After going through it we are confident to encourage others to look into it. It’s not as bad as the banks would have you to believe, and unless abused we don’t think the normal short sale process is “wrong,” quite the contrary actually – if it fits your circumstances, like it did ours, don’t be afraid, it can be a huge blessing.

If you do pursue a short sale, we recommend finding a local realtor who specializes in short sales. We did this and it made all the difference. Our realtor handled everything for us and took over all communications with our banks – I wouldn’t have it any other way.

If you do not use a realtor be sure to use a local counseling agency who specializes in helping underwater homeowners through mortgage modification, short sales, and foreclosures.

Share your thoughts and experiences

If you have an experience or opinion to share that will help the DFA community in a positive way, please add a comment below.

God bless.

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Understanding Debt [Part 2]

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In part 1 of Understanding Debt, we discussed credit card debt, student loan debt, payday loans, financing a car, and personal loans.  This time, let’s take a look at four more types of debt:

1. Medical debt

Medical debt isn’t sought out. Instead it typically results from an unexpected medical emergency.  The best way to avoid medical debt is with sound preparation.  Having a health insurance plan that fits your situation is a must.  People often tell me they can’t afford health insurance, and my response is always “you can’t afford not to have it.”  You can make a bad financial situation much worse by not having health insurance.  It is easy to accumulate a $100,000+ bill when involved in a medical emergency. Insurance is there to insulate you from those huge bills.  You also need to have an emergency fund to cover deductibles or copays as well.  Also, having a baby is expensive (typically around $15,000).  I know many people who are “paying off” their child, which seems ridiculous, but is actually quite common.  If you know the baby is coming you need to do everything you can to save money.  That may mean taking a second job or temporarily stopping retirment savings.  Having a baby is not an emergency, so you should plan for the medical costs.

2. Home equity loans and HELOC

This is one I get asked about a lot.  A home equity loan is often used as a consolidation loan.  There is nothing naturally evil about a consolidation loan.  There can be problems with them however.  The first is that you are leveraging your most important asset, your home.  If something happens where you cannot pay it back, you could lose your home, and that’s a large risk to take.  I have worked with many clients who have consolidated debt in the past.  Two years later, they are contacting me with debt problems again.  According to Cambridge Credit Corp, 70% of Americans who take out a home equity loan or other type of loan to pay off credit cards, end up with the same amount of debt (or more) within two years!  That’s a pretty sobering statistic.  While debt consolidation can work, it’s certainly not an automatic problem solver; if you do it you need to do it right.  I have often seen that taking out a consolidation loan gives people the feeling that they fixed something without addressing the root of the problem which is usually overspending and not living on a budget.

A home equity line of credit (or HELOC) also falls under this category.  The only reason to have a line of credit is to cover overspending.  A better plan is to not overspend (now there’s a novel idea)!

3. Unsecured bank loans

The major problem I see with unsecured loans is that they usually comes from overspending as well.  “I need money fast and don’t know where else to get it.”  Usually, an emergency fund or saving up to buy a large ticket item will make an unsecured loan unnecessary, and is a much safer way to ensure you are buying stuff you can actually afford.  Plus, it takes all the risk out of having a loan.

4. Mortgage

Finally, a kind of debt that I don’t have a major problem with.  Although I would ideally like to see someone buy a house with cash, it’s not typically feasible because of the large amount of money involved.  That said, it is extremely important to buy a house you can actually afford.  My wife Mandy and I found this out the hard way as we sold our first house in order to move into something more in tune with our budget.  I recommend buying a house where your payments will be 25% or less of your take home pay – based on a 15 year (or less) mortgage. Why?  If you take out a loan for $150,000 with a 3% interest rate, you will pay $77,666.90 in interest over 30 years.  If you take out a 15 year loan for the same amount, you will only pay $36,459.76.  That is a huge difference, and when more than 25% of your pay goes toward your mortgage, it’s near impossible to accomplish other financial goals. Another must is to put 20% down at closing.  Doing so will help you avoid private mortgage insurance  (PMI), which is basically just money down the drain.  One final rule: base all of these numbers on one income, even if you’re both working.  You never know what will happen when kids enter the picture.  Even if you both plan on continuing to work, living on one income is always a good idea!  In fact, Mandy and I had to sell our first house because we based what we could afford on both our salaries.  Once our first baby arrived and we decided Mandy would stay home, which through all our budgeting numbers out the window!  If start living on one income but both continue to work, great, now you’ll have more money to give, save, live your mission!

These are obviously just my thoughts on debt.  I will say however that they don’t just come out of thin air.  They’re based on facts, personal experience, and the experience of working with clients who have had these types of debt totally ruin their lives – and to me, the debt just isn’t worth the cost!

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What are your thoughts?