foreclosed houses

[Dada]

Anyone have experience buying a foreclosure?

I'm not looking to flip right away or anything like that but I need to move for work purposes and started looking at houses where I'll be working. I own a house already and don't plan to sell anytime soon due to the market (I'd lose money right now if I sell). So I am going to rent it out and hopefully the rent can pay the mortgage for that house.

I started looking at houses in the new area and it seems like it's almost cheaper for me to buy than rent. I stumbled upon a couple of houses that are actually foreclosures that are pretty nice, although they'll need some work (not sure how much until I see them in person though). They are both in a nice neighborhood and are selling for significantly less than comparable houses in the area since they're foreclosures. The idea isn't to buy both but I will look at both and possibly buy one to live in.

Couple of concerns are whether it's even feasible to get a lone for this sort of thing since I am not selling my current house and don't yet have a renter. Although my credit score is near perfect which is a plus, but on the downside I don't have a lot of money to put down. Also, the amount of work needed on the houses is a concen. The realtor I talked to about one of the houses lead me to believe it's mostly cosmetic. She could be lying of course but a home inspection will determine that. If it truely is mostly cosmetic, then I'm OK with that since my wife used to be an interior decorator and she also did most of the work in our current house. But if there's a lot of heavy construction involved it could get expensive and become not worth it.

[muddy]

Just be sure it's a real foreclosure and not a short sale. Short sales are exercises in madness in my opinion, and often not worth the bother (unless you desperately like the house or location or something).

Also, most lenders right now are big on something up front from the lendee. If you don't have much to put down, you could find getting a favorable loan is dramatically harder than before. If your current house isn't sold, this is another potential problem, depending on your finances, whether anything is owed on it, and the current valuation. But even if the current valuation is favorable relative to any outstanding loan, I would wager most lenders aren't really going to care (at best), and more likely factor it in as a negative.

Don't forget to factor property tax into the cost of ownership in your rent vs buy, on top of all the other things (insurance, repairs, etc). Just because they are selling the house cheap does not mean the property tax is correspondingly low.

Also, try and make some guess at overall trends. What are the odds you can sell this house when you need to, and how far down the road is that likely to be? In many parts of the country, buying now and trying to get out of it within 5 years is probably not a good idea. If this might be you, buying may not be a great idea.

Last and maybe most important, in my experience, real estate is largely a localized thing, so whatever advice you may get here may make absolutely no sense for the specific area you are in.

[Dada]

Just be sure it's a real foreclosure and not a short sale. Short sales are exercises in madness in my opinion, and often not worth the bother (unless you desperately like the house or location or something).

One of the houses is definitely a foreclosure but not sure about the other one. Both are in a great area.

Also, most lenders right now are big on something up front from the lendee. If you don't have much to put down, you could find getting a favorable loan is dramatically harder than before. If your current house isn't sold, this is another potential problem, depending on your finances, whether anything is owed on it, and the current valuation. But even if the current valuation is favorable relative to any outstanding loan, I would wager most lenders aren't really going to care (at best), and more likely factor it in as a negative..

I talked to a lender and actually got a pre-approval letter for more than what I really need (even with only putting a small amount down). Which I felt really good about for about 5 minutes. Then I realized the guy said the approval stuff was based assuming I sold my house. I told him I'm not going to sell but will get a renter to cover the mortgage. Apparently that won't fly in the state of GA unless you have at least 2 years experience as a landlord even though I plan to have a property management company involved. So that might have basically killed the whole idea.

Don't forget to factor property tax into the cost of ownership in your rent vs buy, on top of all the other things (insurance, repairs, etc). Just because they are selling the house cheap does not mean the property tax is correspondingly low.

Yeah this part I am OK with (taxes etc). As far as repairs, if it needed to be completely gutted I definitely wouldn't buy it but small stuff I'm OK with.

Also, try and make some guess at overall trends. What are the odds you can sell this house when you need to, and how far down the road is that likely to be? In many parts of the country, buying now and trying to get out of it within 5 years is probably not a good idea. If this might be you, buying may not be a great idea..

I was planning to hold onto it long term unless it's value shot up a lot after we lived in it a few years and fixed it up.

Well, I might just have to scrap the idea if I can't get financed. Starting to not look so good because I'm not selling my current house. Not willing to sell it b/c I'd lose money on it and I want to move back into it after I retire from the military in a few years. Also the rental market here is pretty good.

[Dada]

Update, I talked to a 2nd lender. He provided me with some more insight. I can do the loan as long as I can show enough money in the bank to cover 3 months rent and have a signed lease agreement with a tenant. My wife says we have the money. But since we don't have the lease agreement yet, we'll either need to wait and do it once we get a tennant or just call the whole thing off. Leaning towards calling it off for now at least. Although I'm not too happy about it since it seems like I've had better luck finding houses to buy than to rent so far.

Oh well, silver lining is I might just refinance my house and get a lower rate. Which will enable me to make a little profit from renting it out. It's a VA loan reduction program so it's easier and no cost to me than a regular refinance.

[muddy]

Honestly given the current climate, I'm surprised the second lender is willing to consider it. Is the rate competitive, and a fixed rate? Just beware of any fine print about closing costs if you go through with it.

[TempestTenor]

My wife says we have the money

Wait, are you saying that your wife handles all your finances and that you are not personally aware of your finances?

[Dada]

Honestly given the current climate, I'm surprised the second lender is willing to consider it. Is the rate competitive, and a fixed rate? Just beware of any fine print about closing costs if you go through with it.

Well, lenders are pretty good with me because my credit score is in the top tier and also because being in the military my job is about as stable as you can get right now. The rate is fixed for just over 5% but there is a closing cost involved which would be rolled into the loan.

I'm on the fence about it though because although it would save me a little bit each month on my mortgage, due to the closing costs being added into the loan I wouldn't break even for a couple of years on the closing costs. Which would be OK if I keep the house for a long time but if for some reason I needed or wanted to sell sooner I'd sort of screw myself.

[TakeFive]

Dada -

Did you do a deal yet?

I bought a foreclosure during the end of last bust (1996). Best deal I ever made. Only downside is the school district isn't so hot, but was able to get transfers for my kids to a much better district in the next city over. If you have kids, this is a major criteria in where you choose to buy.

You mentioned purchasing is less than renting. Does that include property taxes, insurance, association fees, etc?

My opinion is that the real estate market is going to take a major downturn now that summer is over. Did I say downturn? I meant blood bath. Here's a few reasons why:

1. Unemployment is still increasing.
2. Default rate on prime fixed-rate mortages (traditionally the most stable) is now starting to ramp up.
3. Housing was way overbuilt during the boom years.
4. Banks are sitting on a huge shadow inventory of homes that have to start hitting the market before too much longer.
5. A large percentage of homes are underwater (i.e., worth less than is owed). Owners are walking away in increasing numbers.
6. Redefault rate for modified mortgages is nearly 50%
7. Cities are going broke and turning unsustainably high property taxes for funding. Here's a particuarlly galling story of cities selling property tax bill to collection agencies: http://www.nytimes.com/2009/08/18/busin ... .html?_r=1

I would suggest renting for the next several months and see how the market trends. I think one of your posts mention you were looking in Georgia. That's one of the states really getting nailed in this recession, so it might be worth it to wait a bit.

It's interesting to watch this unfold. Besides buying a foreclosure, I also went through a short-sale during the last bust. By just dumb luck, I get to pay about 1/5 the monthly expenses of my neighbors that bought in 2005-06.

[Dada]

I refinanced my other house which saves me a little money each month and now I am hoping to get it rented out ASAP because I'll have to start making mortgage payments again in October. Once I get that rented out I'll be able to breathe again but it's stressfull right now.

I ended up deciding to rent for the time being. The house that I am living in now is a great house with a lot of potential, it is a very large older house and is mostly renovated. I have the option to buy but not seriously thinking about it right now. If I thought I could afford it I'd probably buy it but money is tight right now so unless I came into a lot of money I'll hold off.

[dcjoey]

Just a quick FYI, I'm a licensed Realtor in AZ and could probably answer any questions about foreclosures/short sales anyone may have.

Have done quite a few of both the last couple of years.

[Dada]

Update on this.

In 2010 I'm going to be looking for another good rental income property. The property needs to be one that I myself would be happy living in (even if I'm only buying it for an investment). This ensures that I wont look at a shack that I can't get quality tenants for. It also serves as a good resale investment eventually as compared to a 'cheap' house. And could be a place for me to live in if necessary some time in the future.

My current rental property I used to live in and may end up living in again someday when I retire. I don't make a ton of profit on it but make enough to pay the mortgage off and a little bit extra to put in the bank. It took me a while to get a renter in there but I ended up getting a really great tenant who I know will pay the rent and not wreck the place.

Last, I will not flip any houses. I plan to hold on to the properties for many years so I can build up equity in them. My long term goal is to buy 6 nice properties and keep them rented for several years until I sell eventually (depending on market). Right now is a good time to buy but terrible time to sell. One of the things that took a while with getting my house to rent was that several people who looked at the house loved it and wanted to buy it rather than rent. But we would have lost money if we sold since we had only owned it 2 years wihout much equity built up unless they were going to offer an insanely high amount for it (which we knew wasn't going to happen).

As for foreclosed homes, I'm not totally opposed to the idea still. But would need to make sure there wasn't too much work to do or whatever. I found one near my other house recently that looks like a great deal. The house is only 2 or 3 years old and in an awesome neighborhood. But I think the area is not the best rental market I can invest in because there's a surplus of homes right now there. The area I live in now however, is a better rental market so I may end up buying in this area although seems like houses are more expensive here.