Tips for buying a REO / Foreclosure Home

The Inland Empire market in southern California has certainly gone through a major transition in 2007, setting the stage in 2008, for what I project will be the best buyers market we have ever experienced.

Homeowners who would like to sell for any of a number of ‘normal' circumstances will certainly be disappointed. Although I do believe that prices are near the bottom of the market, since a real estate investor can now purchase a property with minimal rehab expense and turn it into a positive cash flow rental unit.

Although my prediction that the market has come close to hitting the bottom of the market, I do not see and end to the current situation for at least two years, as bad loans continue to be called and end up in the foreclosure process. The effect, I predict, will see a flattening of the market at price points near where we are now - with a much wider base of inventory. While the Hemet market currently has in excess of a two-year inventory available for purchase, I am guessing by this time next year there will be a three and perhaps even four-year inventory of homes for sale in Hemet, CA.

(As we get closer to the end of the year, I will be publishing my projections for the coming year, based on actual statistical analysis, that I will provide - so please go ahead and subscribe to my blog now, to make sure you don't miss this valuable resource for 2008.)

So, the purpose of this article is to give you some advice and tips on what you need to do if you want to take advantage of the down market and pick up a great bargain by relieving a bank of one of it's liabilities, at a great discount - that liability of course is your new home!

Step 1 - Know where you ‘are' financially. Before you even start talking to a REALTOR® or lender. Do you know what your credit look like? Have you paid all of your bills on time for the last 6 to 12 months?

Do you have money down for closing costs and a down payment? What kind of budget do you have to rehab a home - most foreclosures (like most resale's) will require to be painted, new flooring and landscaped at a minimum. So, are you prepared for the hidden costs of buying a rehab and have you factored them into you acquisition costs? Remember a 10% discount is no bargain if you have to invest 12% to make the house a home!

Step 2 - Build Your Credit. Having the funds available is important - having the right credit score can add thousands to your buying power. For example, for a $100,000 loan at 6% interest rate, your monthly payment would be $599.55. The same loan with a 7.5% interest rate would have a monthly payment of $699.21 (Source: SymphonyMortgageCompany.Com)

So, the second most important thing you can do is to build as much positive credit as you can. A couple of tips that can get you started in the right direction. 1) If you are going to cancel any credit cards, always cancel the newest ones first. The older the account, the more weight it carries towards your FICO score; and 2) Never run a credit card balance over 50% of the available spending limit. Of course, always make above your minimum monthly payment every month, and the points will continue to increase.

Mortgage lenders are not only looking at your cash reserves and credit score. They want to see stability in your job and residence. Whatever you do, when preparing for home ownership, don't change jobs (especially career jump) and don't move. One last tip, don't go buying a new car or other expensive item that you will be financing - that is a big no-no.

3 - Know Your Limits. There are many arguments as to why we have the current housing situation. Although I cannot point the finger at any one cause, as I believe there are a number of factors that compounded and fed off of one another that all contributed to the melt down.

I do believe, the entire problem would have been avoided had the consumer just said NO and stayed within their limits and not looking forward to refinancing in 2 years to get them out of the corner they were borrowing themselves into.

I also believe that the current and next generation of homebuyer will never look at a loan product more exotic than a 30-year fixed. Current homeowners are losing their homes to foreclosure, because they did not accurately predict where they or the market would be today. Today's homebuyer wants no such surprises.

The only real way to know your limits, once you have decided what your own personal comfort level is, is to work with a mortgage professional with integrity. A true mortgage professional will care more about the relationship they can build with you for the long term and not how much commission they can squeeze out of you by providing you with the biggest loan possible. (I can HIGHLY recommend two - John Severino and Joey Aszterbaum - click on their links for access to their blogs) More often than not, a mortgage provider can ‘qualify' an applicant for a lot more than the homebuyer is comfortable paying every month.

Once you know how much cash you have to work with, you are armed with your credit score and you have determined what you are comfortable paying each month, it is time to determine how much home you can buy.

The process is very simple, just ask your loan officer or mortgage broker how much home you can buy, keeping your payment at your specific level. Options may differ with alternative down payments and different loan products - so explore your options and determine for yourself, what is the best loan program that will meet your specific needs. Never feel dumb, for asking questions - this I not only your right, it is your responsibility to your family and your future financial well-being.

4 - Know Where You Want to Live! - When shopping for a foreclosure home, you want to make sure you get to know the neighborhoods the homes are located in. Determine your exit strategy. Are you looking for a long term home for your family, or are you an investor looking to capitalize on the down real estate market, buying inexpensively, holding as a rental until the market turns around, or are you interested in a long term rental strategy. No matter what your plan is, the location is an important aspect.

Desiring the very best neighborhood is one thing, being able to afford it is something else. Are you willing to give up amenities and square footage in one neighborhood for a lesser home in a better neighborhood? How important is the school system - in the valley, we have two different school districts - one for Hemet and the other for San Jacinto.

When consider neighborhoods, take several trips through - early morning, after school, weekends, Friday or Saturday night. Check out the local stores and markets. Contact the police department and see if there are any patterns of crime. What are the property taxes - In the valley, we have established homes paying only 1.03% property tax and newer homes with Mello-Roos paying up to 2% in property tax and receiving the same basic amenities.

Check out the public transportation and commuter routes. If you are going to live there - take the time to drive to work (and back) during your commute time or rush hour. Is there a church nearby that will meet your needs? Feel free to walk the neighborhood with your entire family, and get to know some of the neighbors - talk to people and people will tell you what they like and dislike.

You are going to have to balance affordability with location. Some issues are negotiable and others are a must have. So, prepare yourself and know where you want to live and where you don't. If you move into a neighborhood only to discover that you hate it 3 months after you moved in, it's your own darn fault.

5 - Allow for Alternatives - When you are shopping for a bargain in a bank owned property that has been foreclosed on, remember that you are not the only buyer out there (although many sellers believe you may be) with the same agenda.

While it is important to be extremely critical about which neighborhoods you will consider buying your home in, the actual home may not be as critical. Now don't get me wrong, if you need 4 bedrooms, 2 will never do. But, when one home has granite counter tops and 18" travertine tile and the other is plain vanilla - don't be disappointed if you end up with the plain vanilla home.

I emphasize this point, because you must realize that when you are shopping for a bargain in your new home, you are in essence looking for a wholesale purchase. This mandates that you can not be emotionally attached to any particular home until you close escrow.

Perhaps a home has been on the market of over 100 days when you find it, and smell a great deal, so you write an offer for 5% below asking price to find out that 2 more offers came in the same weekend. You see, there are others out there and perhaps it just recently became the ‘deal' after it dropped its asking price.

You must also realize that banks spend a lot of time and money assigning a value to the homes they are selling and typically will not consider low-ball offers - regardless of how good the terms. In looking at the stats in the Hemet market, most REO properties tend to sell for about 3% below asking price...some 4% and very few at 5% with an occasional reduction much larger for some unknown reason. Yes, they do happen but they are rare and when they do happen, typically they have been on the market for an extended period of time and require some sort of major repairs, well beyond the cosmetics that paint, flooring and landscape will cure.

A strategy I have seen very effective with informed buyers is to make offers on multiple properties, simultaneously. Each transaction is then negotiated to its lowest possible point with the best terms for the buyer before one is accepted and the others are rejected. This keeps the emotion out of the equation.

6 - Understand the Bank Documents are ALL Different - When buying a bank owned REO home that has gone through the foreclosure process, you must understand that the bank is not a ‘regular' retail seller and has a different set of rules to play by.

First, in over 95% of the time, the bank will not be making any repairs - to include termite work. By California law, they are required to have a working smoke detector and the hot water heater must be strapped for earthquake safety. So, unless you are making a full price offer, don't even consider asking for any help getting the place cleaned up.

Second, the bank is in the business of making money. There are several lenders who insist that every offer to purchase their REO property is accompanied by a pre-approval from their lending branch. Typically, most banks would love to turn a non-performing liability into a working asset.

Third, you must know that lenders will add their own clauses into the standard CAR purchase agreement. Again, every bank is different, but a typical addendum will specify that the seller will choose the title and escrow companies; the seller will emphasize that the property is being transferred "As Is"; the bank will not be paying for a home warranty; and that if escrow goes past a certain point that any good faith deposit will be forfeited to the bank.

It is critically important that you understand the very specific aspects of the paperwork you sign. Take your time and ask questions.

You see, buying a REO foreclosure home in Hemet is very similar to buying any other home in Hemet - but there are some very unique rules that you must learn, if you are going to have to learn and play by if you really do want that once in a lifetime deal.

Until Next Time, Have a Blessed Day,

John Occhi, Hemet CA REALTOR®
Mission Grove Realty

Author of "What You Need to Know...About Foreclosure and How You Can Stop It!" - If you are a Hemet or San Jacinto Homeowner please call (951-443-6259) for your free copy.

This blog and the contents written here is the intellectual property of John Occhi, Hemet California REALTOR®. The views and opinions expressed are just that - views and opinions of John Occhi and those who comment. Please note that I am not an attorney or a tax professional and any time I discuss either topic, I suggest you consult with the proper professional for relevant assistance.

This blog is part of the ActiveRain Real Estate Network, which is a social network highlighting the best of Web 2.0. Information is provided with the intent of educating and assisting home owners, home sellers, home buyers and real estate investors with information the can be used to make better real estate decisions.

I am proud to be a full time REALTOR® with Mission Grove Realty who is proud to be a contributing member of the ActiveRain community.