What is today’s hottest topic in Real Estate?

Is it any surprise that one of the most common questions we hear people asking these days is “Can I get a good deal if I buy a foreclosure and is now a good time?”
The answer depends on who is asking and where they are thinking about buying. The short answer is simply to “check with your local real estate agent.” We say that because the most accurate answer to the question is based on local market conditions and the individual financial status of the prospective buyers — two pieces of information best determined by a good local real estate agent. Not just ANY agent either, but one who is experienced in foreclosures and works full time in the business. Real estate depends on the local economy and, even here in the Bay Area, it depends where you are thinking about buying. Knowing where foreclosures are hot helps so look at the current stats for all the cities in Alameda and Contra Costa on our sister website and, for example, in Antioch over 90% of homes available today are either bank owned or in pre-foreclosure! If you also look at overall market trends & conditions for these Easy Bay cities, you can see that the available inventory is being bought up as fast as it’s coming on the market with less than 2 month’s inventory in most areas… and almost all of this activity is in the foreclosure arena.

Unfortunately, some agents are still steering their clients away from foreclosures simply because those agents don’t understand how foreclosures work. Other agents are writing offers as fast as possible because their clients understand the sweet opportunity of buying now when the market conditions have swung to the opposite extreme of the hyper-market we experienced from 2001 to 2005 when homes were far overvalued and overpriced.

Now, the market has shifted, as it always does, and everything is slowing to a snail’s pace: Home prices in many areas are plummeting, new home builders are inactive, and many prospective buyers and investors are sitting on the sidelines and waiting and watching as the inventory of homes for sale skyrockets. That makes today’s market all the more attractive to fiscally sound buyers and investors. Those are the ones buying and they are buying everything their agents can find for them!

Foreclosures typically represent the most motivated sellers, which can be a good thing for buyers … but buying a foreclosure can be one of the most complicated real estate transactions a buyer can make. Unlike a traditional real estate deal, buying a property in default or directly from the bank is not an endeavor for the faint of heart. There can be pitfalls, and most foreclosure buyers choose to work with experienced agents.

Here are some tips to navigating the turbulent foreclosure waters:

Avoid outstanding liens

How do you know a good foreclosure from a bad one? Certainly bargains exist, and buyers can get great deals, fix the house up, live in it or sell for a profit. But making money can be tricky in a real estate market cascading downward.

First, there’s the complex business of unpaid liens, including mortgage debt, taxes, construction loans, home equity lines of credit, and possibly a second or third mortgage. Any or all of these financial obligations could become your responsibility if you purchase a foreclosure property prior to auction. When the property goes through a foreclosure auction and becomes a bank-owned property (REO), the outstanding foreclosure liens and fees are wiped out and they are not transferred to the new owner. You don’t want to fall into the same financial trap as the previous owner so buying AFTER the sale is less risky.

Understand home value

In a depreciating market, it’s hard to know when you’ve reached the bottom of the market. It’s hard to predict where home values will be five or 10 years from now, but one thing is certain this year — home prices are falling in most Bay Area cities and buyers are nervous. No one knows when the housing crisis will stabilize. So we encourage our clients to factor in falling prices into any offer they submit on a foreclosed property.

Be prepared for surprises

This is a great opportunity to buy for those who have the cash. If you are planning on renting out the property long term or even reselling it for a quick profit, make sure you consider the carrying costs — including sales commissions, marketing costs, vacancies, taxes, insurance and maintenance costs. Once you’ve calculated all those expenses, add an additional 10 percent to 15 percent on top of the carrying costs for unknown expenses and hidden costs. If you don’t prepare and maintain such a “contingency fund,” you might be the next foreclosure statistic. In short, buyers and investors must have a substantial amount of cash in order to safely turn a profit in this dicey foreclosure market.

Beat the bank

Lenders are drowning in defaults. Banks are slashing prices to lure buyers back into the market. So now is the time to make deals with the banks. Lenders are motivated to cut a deal, especially in areas where they have large inventories of unsold properties, did we mention Antioch earlier? If you have a good credit score and are buying a bank-owned home, many banks will offer you below-market-rate loans. Unlike paying down with points, this doesn’t cost anything in fees, and it gives you the ability to spend more for a home: Since present dollars are more valuable than future dollars, the real value of the loan, over its life, will be less.

Watch for foreclosure spikes

In this battered foreclosure market, choosing the right neighborhood is more important than ever. Your clients should avoid neighborhoods overrun with foreclosures, particularly newer subdivisions in exurban areas where developers overbuilt. Neighborhoods with a high concentration of foreclosures will offer investors good prices, but those neighborhoods are the most likely to suffer further depreciation. Investors will be tempted to buy foreclosures in these areas, because they offer the steepest discounts — but they also carry the most risk. Look for foreclosures in well-established neighborhoods with good schools and easy access to transportation. For this reason, we suggest looking for deals in areas like Danville, Alamo, Walnut Creek, San Ramon, Dublin, Pleasanton, LaMorinda and other areas which have far fewer foreclosuresThe competition is great in these areas too and that’s an even more compelling reason to work only with an experienced REO listing agent who will know about homes even before they come on the market. Look at the East Bay statistics again to locate your areas of interest.

Foreclosure financing

It can’t be said too many times; get pre-approved for a loan before you shop for a foreclosure. Financing on an investment or second home has always been more difficult — and more expensive — than financing a primary residence. Lenders typically charge higher interest rates and require a larger down payment for investment or second homes. The main reason though for pre-approval is so that the bank will even LOOK at your offer. Without pre-approval your offer goes on the bottom of the pile. We will not even take on a new client unless we have their pre-approval, it’s THAT important.

Plan an exit strategy

Finances aren’t the only reason you might need to divest your foreclosure investment. Job transfers, illness, death and divorce are just a few unexpected circumstances that can force you to sell. Whether you decide to rent or sell your foreclosure for a profit, some forward-thinking on your part can help the transition through the hard times.

Despite the myriad obstacles, investors and homebuyers can locate great foreclosure deals if your timing is right. This is the time of opportunity — and you can seize it. Today’s foreclosure bargains will not last forever.

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