GUIDE TO BUYING CENTRAL IOWA FORECLOSURE PROPERTIES
Foreclosure properties are a segment of the property market in and of themselves. They can provide value for an investor or home owner, though this is not always the case. The mechanics of the transaction are similar to an ordinary resale, but there are quirks to be aware of and anticipated. Banks are straddled with record amounts of property and there are some great deals out there, but as with any purchase you can strategize to take maximum advantage of market forces.
Use this report as a guide only for the central Iowa market. Foreclosures are offered by many companies and agencies, so policies and procedures vary wildly. The most important thing to keep in mind is that buying a foreclosure is not the same as buying a normal resale home, and that approaching the transaction as if it were a normal resale is a recipe for failure. This report is geared towards the investor, but may be employed effectively by any purchaser. Please note also that this report does not apply to HUD homes. Updated 08/13/08
#1 Be preapproved or have validated funds
In the foreclosure world this is a must. It is not necessary to have a formal pre-approval letter, a letter of credit or proof of funds will operate as effectively. You shouldn't even go looking without this.
#2 Move on new properties quickly
Good properties that are priced low sell fast, so be prepared to go looking the first day or two after a property you like becomes available. Expect hot affordable properties to have multiple offers within the first few days of listing. It's important that you make your analysis of the property quickly and submit your best offer for consideration as soon as possible.
#3 Don't always expect fire sale discounts
As noted above, competition is fierce for new value priced listings and offers are handled differently for foreclosure properties. Traditionally, buyers expect sellers to counter low-ball offers, not often so here. Your offer may simply be rejected if it falls out of the acceptable range.
If a property is not a "hot" ticket however and has been on the market for some time, or is priced $75,000 or above, buyers have been known to get substantial discounts. Drastically reduced prices are more likely if the property has been listed with one broker and not sold, then relisted with a different broker, or has been on the market more than three months.
#4 Know what repairs cost
More often than not, these homes need some TLC. If you know the cost of common repairs off the bat, you can evaluate the home quickly. If you need to call an electrician, plumber, carpenter, roofer, etc, every time you look, you're dead in the water. Plus, after a few times of dragging crews through homes you don't buy, you might find your trade pool shrinking drastically.
#5 Property sold "AS IS" Buyer must sign addendum in lieu of a disclosure
On a normal resale the owner occupant fills out a seller's disclosure stating known conditions of the property. On foreclosures, the property may be being sold by an asset manager fronting for a large bank or financial concern, and/or by the government. The seller has never visited the property and therefore has no knowledge of conditions.
What the seller will provide is an addendum. This addendum states the property is being sold "as is" and will spell out any special terms of the sale. Addendums can run up to eighteen pages or more. Provisions will supplant the terms of the purchase agreement, so the addendum should be read carefully. Often a signed addendum and lead hazard page will need to accompany all incoming offers, though this differs.
It is not uncommon for all the utilities to be disconnected, meaning no lights, no heat, no water. Most, if not all, will have the water meter removed and the plumbing system drained. You may not be able to get the utilities turned on to do your inspection of the property. If you are able to get the utilities turned back on, often you do so at your own expense.
#6 Addendums take charge
You must submit a written offer to purchase on any foreclosure you want to buy. You will also be required to sign one or more addendums as part of the purchase as stated above. Understanding the concepts behind addendums will save you a great deal of stress and confusion.
Individual state laws and brokerage operations will affect how the "Boiler Plate" on a purchase agreement will read. In contract terms, "Boiler Plate" is language that is pre-printed on an agreement and does not need to be written in. Since the company selling the foreclosure may operate in many states, they need an instrument that will guide the purchase in a similar fashion whether a property is sold in California or Connecticut and by RE/MAX or Prudential.
The addendums on a foreclosure serve to operate as the real agreement. You will state your terms on the offer, and they will often be restated in the addendums. Addendums will also state per diem charges. These are charges of up to $250 per day or more if the close is delayed AS THE FAULT OF THE BUYER, NOT THE SELLER. Invariably, every first time foreclosure buyer balks at the per diem and fears the worst. Per diem charges only come about if the buyer is not in a position to close on the date agreed upon in the addendum.
#7 Termite Inspection is on the Buyer
In an ordinary resale, the seller will pay for a termite inspection of the property. This report is needed by the lender as part of their due diligence in underwriting the loan, as presence of termites or past infestation may affect the lender's security.
With foreclosures however the buyer is often responsible for the cost of this report which runs around $100.
#8 No subject to sale offers
If you need to sell a home to buy a foreclosure, you cannot make that a contingency in the purchase agreement. This is universal. There are no subject to sale offers with foreclosures. You need to prove you have the buying power or the funds when you submit the offer.
#9 Come out with strong offer
The gold standard is an offer that comes in above, at, or near full price, is cash, does not call for an inspection, is not contingent upon an appraisal, and does not ask for repairs or seller concessions. Your offer need not be framed as the above, but be aware that attractive offers offer the most and ask the least of the seller.
Government offered homes such as those by Fannie Mae, Freddie Mac, and HUD are more likely to allow seller concessions for owner occupants, such as covering a buyer's closing costs, but it is highly unlikely that they will accept an offer requiring repairs of any kind to be made.
It is advisable in submitting an offer on any distressed property to NEVER ASK FOR REPAIRS. Please note also that although your offer may be strengthened by declining an inspection, I strongly suggest that you always perform them.
On homes priced above $75,000 however there is more latitude in what the seller will accept. If your financing is strong, you may be able to negotiate a very lucrative discount if you know the ropes.
#10 Offers may be pooled
On a normal resale offers are often dealt with on the basis of who was first. On foreclosures, companies may wait for new offers to come in, without countering or accepting any of the initial offers. You may have the first offer in, but the ninth offer may receive as much consideration.
Sellers may not respond at all to low offers, or they may notify you that there are multiple offers, and that you should submit your "highest and best" offer. In this situation the listing agent will call all buyer's agents back and ask them if the client would like to change the terms of the offer, i.e, raise price.
You may stand pat, or you may raise your offer. The sellers want the highest maximum return, so they may not suggest a price. It is often up to the buyer to decide how high they want to go. This situation is analogous to an auction.
#11 Expect delays in offers and closing
There are several reasons for this. These properties are often being sold by an asset manager that is representing a large bank or financial concern. The asset manager might be even twice removed from the source. At the actual level of contact, often one representative will handle the offers for the seller. If that person is out of the office the day or week your offer comes in nobody will tell you anything. That representative, if they are in and review the offer, will then probably have to take the offers to a supervisor or committee. That group or person may then have to go up the chain for approval. This can cause delays to develop.
Expect response times on offers to be from mere hours to over three days. You may submit a very good offer that expires if not accepted in one day, but nobody may notice, even if your agent takes great pains to point out how wonderful an offer it is. Equally ineffective is having your agent call and badger the listing agent. It does not matter when you time out the offer, if you and the seller both agree, the offer would be valid even if signed after expiration.
Another factor is title issues. The property may have gone through more than one asset management company or listing broker. It may take some time to get all the records assembled for you to get clear title.
A further complication is the property abstract. Iowa law requires that the property abstract showing a history of the title of the property be updated with every sale. In the foreclosure process this document often gets lost. The owner of record then needs to perform a Root of Title and rebuild the abstract. This can take from three to six weeks, depending on how busy the title company is. One would expect the seller to order a missing abstract at the time of listing, but it does not always happen this way.
#12 Find value
On any given day there are hundreds of people out looking actively for foreclosures. You need strategies to beat out these folks to be successful.
Some great values can be had on higher priced homes, those selling for $75,000 or more. As more and more newer properties succumb to foreclosure, more choices become available to buyers. On higher priced foreclosed properties the difference between settled and listed value can be up to 40%. That is the difference between the first listed price and the final sold value, though the property may have been discounted several times.
Another way to get a good buy is to find value where others can't see it. This would be in homes needing what seem to be major repairs in the form of foundation problems, roof issues, aged mechanicals, rotten windows, and sloping floors. These properties can hold great value as they are often passed up by those looking for the home that simply needs "cosmetics". They are often the properties that sit on the market for longer, and therefore are ripe for bargaining.
Foundations are the scariest for many. Would it surprise you if you knew a twenty foot basement wall could be rebuilt of concrete block, with a footing, from around $4,000 depending on who you use?
Roof work is also intimidating. Roofing can be done inexpensively if you know a small roofing specialist and use them often. Find one you can work with or do it yourself.
Mechanicals, in the form of furnaces and water heaters can be a major cost. If you're calling the company that has the fleet of trucks, you'll pay more than you need to. If you find a smaller contractor, buy a lesser known model of furnace, air unit, or water heater, you can get by for less.
In the Des Moines area there are a lot of foreclosures with window problems. A quick fix is storm windows. Find a source where you can get them for less than retail, such as a lumber yard. Double pane white vinyl windows can also be purchased inexpensively, and add a lot of appeal to a property. Replacing windows can be easier than you might think if you've never done it.
Floors also scare off the timid. While level floors are best, older homes often experience some settling or other issue that will affect the quality of the floor. Sometimes it is simply the case that there were not enough supports in the original design. In this case, floor jacks and blocks can be used to inexpensively remedy the problem if the floor joists themselves are not damaged.
#13 Tactics for getting offers accepted
Should you decide to pursue investing in foreclosures and you actually go out and look at some, you'll realize many are in desperate need of repair. Foreclosures are often referred to as "distressed property". The seller knows this, the listing agent knows this, and that is the reason many are priced below market.
Part of your offer strategy, in my humble opinion, should not be to present a lowball offer on a newly listed foreclosure supported with a laundry list of repairs necessary, all of which you instruct your agent to dutifully report to the listing agent. The agent knows the property is in disrepair. His hands are tied. He or she will only convey the terms of your offer to the seller, not a litany of property defects that justify your lowball offer.
You cannot strong arm your agent or the seller's agent, even if they are one in the same, into getting you a significant discount on a property due to conditions right off the bat. This is as immutable as the grass is green and the sky is blue. A better tactic is to submit a competitive offer with solid financing and clear cut terms.
Many times in the past I have submitted the lowball offer as instructed, pointed out the defects, as instructed, with the result often the same: 1) Your offer was rejected. 2.) A higher offer was accepted. 3.) The seller countered at $100 under the list price. 4.) There are four other offers, please give us your highest and best.
In my experience, and the experience of other agents I work with, buyers that employ this type of strategy end up dropping out of the market, disgruntled, without any accepted offers, thinking they were cheated by the system somehow. The reality is that the listing agent has a duty to the seller to get the best price and the best terms possible. They are prevented by law from even insinuating that the seller will accept any other terms than those listed in the MLS data. Additionally, many offers are submitted initially via an electronic medium, meaning no verbal communication. The likely hood of a listing agent submitting an offer to a seller with a note saying "We should accept this offer because there is mold, the roof is sagging, the toilet is missing, etc", is next to nothing.
There is a better way! Use the lowball on property that has been on the market more than thirty days. Beef up the lowball by offering terms favorable to the seller as mentioned in #8, cash, no inspection, thirty day close, and no closing costs covered. Additionally, you may use the strategy of writing an inspection into the offer, and then going for a discount based on discovery during the inspection.
Consider the seller's position. They don't need the money to close on another home or to move to Las Vegas to pursue a career as a dancer. There is no emotion for them. It's a numbers game. They will sell out at the right rate however. You just need to find what that is. Bank’s are not in the property business, they are in the money business. They want the money back so they can make loans but they have to operate within certain limits.
(Lowball offer means more than 5% below list) Please note also that although your offer may be strengthened by declining an inspection, I strongly suggest that you always perform them.
#14 Financing
A growing number of info-mercial personalities assure their audiences that anyone can make a fortune in distressed properties with no money down. Testimonials show people holding up checks, saying "I made nine thousand dollars my first month!" I hate to be the bearer of bad news, but it doesn't seem to work that way around here.
Lenders generally do not give one hundred percent financing on foreclosures because of their condition. Additionally, sellers do not universally give concessions and cover buyers closing costs.
Some lenders are not experienced at lending on foreclosures. Make sure that you are working with a lender that has dealt with foreclosures, so you can be sure there is no hang up with your financing. The addendum that you sign will often state per diem charges that you will pay if you delay closing. Those charges can be from $50 to $250 dollars a day.
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