Foreclosed homes appeal to buyers for one main reason: they tend to sell for less than comparable houses. The catch is that you buy them as-is. Whatever is wrong with the house becomes your problem the day you close.
So the question with any foreclosure is how the purchase price compares with the cost of repairs. That’s true whether you plan to fix and flip it, rent it out or live in it. These three steps will help you get that comparison right.
1. Work with an agent who specializes in foreclosures
Real estate agents specialize, much as lawyers do. Some concentrate on commercial property and some on foreclosures. An agent who handles foreclosures regularly knows what to look for in a distressed house and how to negotiate with a bank, which is a different process from dealing with a homeowner.
One credential to look for is Certified Distressed Property Expert (CDPE). Agents who hold it have completed training focused on foreclosures and short sales. A good specialist will also steer you away from properties that don’t fit your goals, which saves you time.
2. Line up funding and a preapproval letter
Unless you’re paying cash, the bank selling the property will want proof that you can close. Offers without it tend to be ignored.
There are a few ways to arrange the money. Because foreclosures often sell fast, many investors use a private lender, who can commit funds sooner than a traditional bank. Sachem Lending’s distressed acquisition loans are designed for this kind of purchase.
3. Run a comparative market analysis
With your financing in place, decide the most you’re willing to pay. Since you’re buying as-is, there’s little room for error.
Ask your agent to run a comparative market analysis. This looks at recent sale prices of similar properties nearby, so you can see what the house should be worth in its current state and after repairs. Subtract your repair estimate and your costs, and you have your ceiling. Don’t go above it in a bidding war.
One more thing: inspect what you can
Some foreclosures can be inspected before purchase and some can’t. When you can, bring a contractor. When you can’t, budget for problems you haven’t seen, such as plumbing, wiring and roof damage. We go deeper on these risks in Buying a Foreclosure? Read This.
Have a property in mind? Contact Sachem Lending to talk through financing.
