Real Estate News: RE/MAX offers tips for buying a home in foreclosure

June 6, 2012

By RE/MAX

CHICAGO — Last year, more than 20,200 homes repossessed through foreclosure were resold in the metropolitan Chicago real estate market, including single-family residences, townhouses and condominium units. The median sales price of those homes was $74,200, according to RE/MAX.

Among real estate professionals, foreclosures are commonly referred to as REOs, an abbreviation for “real estate owned” by a lender. In 2011, REO sales accounted for 29 percent of all home sales in the seven-county Chicago metropolitan area compared to 24 percent in 2009, according transaction records maintained by Midwest Real Estate Data, LLC.

The growing foreclosure market is attracting many buyers, both those looking for a home of their own at a bargain price and investors who either plan to improve and resell quickly or use the property as a long-term rental. Aided by the fact that mortgage interest rates are at historic lows, foreclosures have become the catnip of the residential real estate market.

However, not every would-be REO buyer follows through. Buying properties in this category presents a different set of challenges than making a more traditional home purchase.

A majority of first-time buyers I see want to purchase an REO, but after they view the homes available, many say, ‘this isn’t for us,’” said Matt Pittman of RE/MAX Achievers in Lombard, Ill. “Buyers will do themselves a service if they research the subject of REOs and understand the unique aspects of this market segment.”

Here are a few important tips for buyers interested in REOs offered by RE/MAX agents with extensive experience in that segment of the housing market.

1. Assemble a qualified team: Because buying an REO is different than purchasing other types of homes, buyers should be sure to have a qualified support team on their side, recommended Linda O’Donnell of RE/MAX Signature in Chicago.

Along with using an agent who knows both REOs and the local market well, you’ll want an attorney experienced with REOs and a highly competent home inspector,” O’Donnell said. “A thorough inspection is a must when buying an REO because the seller makes no warranties about the condition of the home.”

2. Understand the link between condition and financing: REOs can come in a range of conditions, from essentially move-in ready to uninhabitable without extensive repair, and the condition of the property can make it ineligible for certain types of financing, notes Ed Lukasik Jr., of RE/MAX Professionals in Bolingbrook, Ill.

Cash buyers can purchase anything they can afford, but buyers who need financing will face certain limitations, depending on the condition of the building,” Lukasik said.

To get conventional financing from a private lender, the home will have to meet specific criteria at the time of appraisal, according to Lukasik. The kitchen and at least one bath will have to be fully functional, though kitchen appliances aren’t required, and all utilities, including heat, water and electricity, must be operational.

However, if the buyer wants to use FHA or VA financing, the standards are even stricter, especially in regards to safety issues. For example, flooring and walls can’t have holes in them. The exception, he said, is that FHA offers so-called rehab loans through its 203K program that can be used to finance homes with deficiencies so that repairs can be made after closing.

Depending on the type of financing they want, buyers should understand the condition requirements and adjust their house hunting accordingly,” Lukasik recommended.

3. Don’t assume every REO is a bargain: While many REOs are terrific values, that isn’t always the case, advised Tomas Gomez of RE/MAX Showcase in Waukegan, Ill. Even the least expensive REO can turn out to be a poor investment.

You have to look beyond the price of the property itself and see what it will cost to bring the home’s condition up to a level that will work for you, whether it will be your own home or a rental or a resale,” said Gomez. “Once you have determined that number, then you should look at the housing market in the immediate area and see if the home you will have is worth what you are putting into it. If it costs $30,000 to fix up an REO that cost $50,000 to purchase, you don’t want to end up with a home that could only be sold for $65,000.”

4. Don’t be surprised if there is competition: Inexperienced buyers often imagine that REOs are properties that no one wants. While that can be true, it often isn’t the case.

In the last week and a half, I’ve written cash offers on four or five properties for investors, and we have been outbid,” reported Matt Pittman. “In fact, you can expect multiple offers on REO properties that are aggressively priced, especially on really good properties.”

Pittman said that his strategy in such situations is to offer slightly more than list price — perhaps $150,000 for a home listed at $149,900. “Nine times out of 10, my buyers get the property if we get our offer in first,” Pittman said.

When they don’t, it’s because the bank will then ask all bidders for their highest and best offer.

That’s when the buyers have to make a decision on how much they are willing to pay and what the value really is,” Pittman said. “I’ll advise them on how high I’d go, but the buyers make the final call.”

5. Get comfortable with the REO concept: There are a number of ways in which buying an REO is different from a more traditional purchase, but generally the differences are not something over which you should lose sleep, contends Anna Klarck of RE/MAX Showcase in Long Grove, Ill.

I love getting my clients into REOs because if the transaction is handled properly, it has so many advantages,” she said. “The negotiations are easy because all we’re discussing is price, and the sellers have a clear idea of what price they will accept. The sellers will also have some contract addendums that buyers should review and have explained to them if necessary. Usually, the closing is quick, and for those buying to live in the home, a two-year home warranty is part of the package.”

Best of all, said Klarck, “if buyers do their homework before purchasing an REO, the home they get usually is worth more than they paid for it, so buyers often walk away from the closing table with an immediate profit, and they can recapture that profit by refinancing the home in a few years.”

From the June 6-12, 2012, issue

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