10 Need-to-Know Tips When Buying a Foreclosure

Take it from a recent foreclosure buyer: the market is beyond awesome. If you were one of the fellow spendthrifts who didn't jump into an ARM five years ago and have saved up for a home, now's the time to clean up. Mortgage rates are still hanging around 4.35 percent for a 30-year loan and property values are continuing to slump.

But the foreclosure buying process is still a messy one and requires exceeding patience from everyone involved in the process. Even Fido will be stressed by the end of it. If you are tempted to jump into a foreclosure deal, make sure you consider these thoughts--fresh from the frontlines of recent a recent homebuyer.

1. Get a Full Inspection
It doesn't take a genius to know that an inspection costs a good amount of money--between $500-750 for all parties involved--but you need a full report on your future abode. A good deal may seem great, but if the place needs new water heaters, AC compressor, and new drywall, you're talking big (non-negotiable) bucks up front.

Definitely hire a general inspector, termite inspector, and heating/cooling expert to poke in every nook and cranny. If you have even an inkling that the foundation is bad, get a structural engineer to do a report. And you need to be present during the entire inspection! Not only do you need to know exactly what's wrong, but make sure they check everywhere. Take pictures as they point out problems and ask their professional advice on how to fix it or who they'd recommend for professional work. The images you snap will be a huge help two months later when you forget what each inspector told you.

2. Firm Closing Date
Make your closing date absolutely clear to your lender and follow up frequently with checkups. The trend for lenders is to wait until the last second to finish gathering paperwork and then ask for an extension--regardless of the type of loan. Your personal problem with this is that bank-owned properties charge a per diem fee of $150 every day beyond your closing date! That's money out of your pocket, not the lender's. Your realtor will also help speed things along, but be proactive here to spare paying loads extra for someone else's negligence.

3. XXL Cash Flow
Gone are the days of home equity loans rolled in with the initial loan--which is part of the reason folks got into trouble! Homebuyers were taking on 120-percent loans when their house wasn't valued that high. Then they forked over massive amounts in interest (7.03 percent for home equity loans). All this to say if you need $15,000 to make the place livable, be ready to pay it up front. Our home needed several plumbing fixes, cabinet refinishing, furnace overhaul, and retiling in part of the kitchen. Even after recruiting family and friends to lend knowledge and skills our total repair cost came to $10,500. The same goes for future repairs. Save up first, then pay for them.

4. Check Maintenance
Want to know how well the house was cared for? Check the air filter. Look at the yard. Check the cabinets under each sink for water damage. Chances are big that the previous tenant didn't do much preventative care, in which case you'll need to know what to pay for.
 
5. FHA Loans are Great...with One Caveat
At the beginning of this process, Hubby and I were anti-FHA. Who wants to pay extra for mortgage insurance each month that doesn't go toward equity? But the most attractive part of an FHA is the 3 percent to 5-percent down as opposed to 15 percent to 20 percent with a traditional loan. Let me be clear about something...this is only a decent option if the foreclosed property you're buying is an incredible deal (and you have the money to fix it up). Plus you need to plan on making one extra payment per year to reduce the term of your loan. You'll soon be in hot water if you put next to nothing down for an FHA loan and don't have extra cash to improve the property. The high mortgage coupled with big repairs will leave you in your new, poor house.

6. Check Out Neighborhood Comparables
Look around the street. Find out what square footage is getting in the homes around the foreclosure--not what they list for, but what they sold for. Comps in our neighborhood selling in 2010 sold for $20 per square foot. higher than our place. Being able to turn it around right now for profit is a huge comfort.

7. Volatility
Thanks to Uncle Sam's long reach, the rules for closing continue to change. For a long time the credit score was a homebuyer's Holy Grail. Now a buyer needs to put 15-20% down in many cases plus provide multiple sources of documentation for income (a nightmare for the self-employed among us). Credit score matters, but not as much as your down payment and proof of cash flow. Fleeting government bailout programs are unreliable at best! If your community has something in place, make sure it will still be available by your closing date--remember the government's inability to pay the Cash for Clunkers program? The rules change very quickly, so stay informed throughout the process.

8. Insurability
Our general inspector, who pointed out every crack and blemish in the place, pointed let us know about several rough patches on the roof. I wouldn't have noticed them before, but even more valuable than that was his advice on the matter. He let us know that some insurance companies will only insure part of a house (i.e. not the roof) if they do their own inspection, much like pre-existing conditions for health insurance. Don't wait until the lending and title authorities ask for your insurance information a couple days before closing--get it done as soon as your offer is accepted to avoid frantic scrambling to get the place insured.

9. HOA Past Dues
Sometimes the bank pays for the dues and occasionally they don't. Who's on the hook for past dues? Congratulations, new home owner! Most associations will provide you with a wealth of bathroom material regarding laundry lines, chicken coops, and trailers. Plus you'll be presented with annual or monthly property fees, past due and current. Just make sure you know how much is owed and who has paid it. Unless a South American dictator runs your board, an HOA is a great help in keeping the community uniform and selling prices higher. Snag a few more HOA tips before buying in a planned community.

10. Banks Aren't Always the Bad Guy
When Hubby and I found our foreclosure in August of 2010 it was a complete wreck. The previous rental tenants let their dogs defecate and barf all over the place, there were holes in the dry wall, and the vents looked like giant hairy spiders.

All nasties aside, we knew the price per square foot was a incredible and put in an "As Is" offer. But the owner, Bank of America, did not sell it to us as is. They put in new carpet, painted and patched the walls, and even replaced the water heaters. But that's not all! They also replaced the garage door, repaired an exterior water leak (on the private side), and replaced a sprinkler head. We discovered later that they put in landscaping several months prior. Then when our lender didn't stay on top of things and we were forced to ask for an extension, Bank of America allowed us another week at no charge. They were consistently prompt and responsive as opposed to our local lender.