Want to snag a foreclosure? Pt. 1

I got a question asking how we found foreclosed homes. Rather than make one long comment, I thought this would be great for a double installment.

I want to start off by saying, your own personal house is not an asset - it is a liability. Your home's equity is NOT an asset. If you want to know more about why this is, check out Jim's Random Notes. (The book he mentions, Rich Dad, Poor Dad, I first read when I was 13.) or read everything but the last paragraph here.

When you first decide you want to buy a foreclosure, think about if you're willing to put a little elbow grease into a house. When the market was hot, really hot, in my particular area, people were camping out for homes, bribing neighbors with cakes, faking references, etc. It was nuts. If a seller wanted a house to bring in top dollar ($700,000+) they staged the house, had it professionally cleaned, maybe redid a kitchen or bathroom and had it professionally landscaped. This isn't the case anymore. For example, here's the backyard in the house we just bought:

I'm 5'9. Many of those weeds are taller than I am.

There is no way a house would have looked like that back when the market was climbing. Most of the houses my fiance and I looked at needed work - and 99% of them had been built after 2001. For example, our house, which was built in 2006, needs all the carpet replaced because somebody poured bleach on it, our sliding glass door's handle has to be replaced because somebody broke half of it off and a window screen needs replaced because somebody sliced it.

A lot of the houses we looked at (we probably have looked at close to 30 houses.) needed doors replaced. Bedroom doors would have huge holes in them from previous owners, I'm assuming, just kicking them in. Counter top tile would be broken with a hammer, cabinet drawers were missing, appliances would be gone (which is illegal for the previous owners to take, but they didn't care.) Some houses look as if the owners, while understandably upset, moved their furniture out and didn't care if it hit a wall or a window or anything else - some still had junk left behind in them. Some houses, such as in the case of the house my fiance's sister bought, has to be completely gutted. If you're wanting a move-in ready house, foreclosures aren't for you.

If you've decided you're up for hanging a piece of drywall (takes 10 minutes to hang a new piece) then you need to go to a bank to get pre approved for a loan. Yes, this is step two, not step # later down the line. In our particular market, if you see a house, you need to put an offer in on it that day so you need to already have your loan ready to go.

Do not, under any circumstances borrow more than you need to. Don't borrow extra to use a little to buy a car, pay off credit cards or anything else. Just don't do it. If you think you can afford a $300,000 loan, get a loan for $250,000. You don't want to be living paycheck to paycheck. You want some cushion in case of emergencies. Do not, I repeat, DO NOT get an Adjustable Rate Mortgage (ARM.) Do NOT get any loan that is longer than 30 years. That means no 40 year loans, no 50 year loans. If you can't pay it off in 30 years or less, you can't afford it. Period. If possible, get a loan where you don't get penalized for paying off more of your mortgage than is due that month.

For example here's a 30 year mortgage for our house, versus a 15 year mortgage for our house. The monthly payments aren't what you look at, it's the final cost of the house you look at. If you notice, the monthly payments for the 15 year mortgage are not double the price of the 30 year mortgage monthly payments.

30 year mortgage

15 year mortgage

Difference in money saved with a 15 year mortgage vs. 30 year mortgage = $100,800

After you get pre-approved for your loan, gather up the money you're going to use for a down payment. If you don't have any money for a down payment, forget about buying a house right now because the amount of money you'll pay on interest back to your bank will mean you end up paying twice as much, if not more, for your house and your monthly payments will be huge.

Try to squeeze every last penny you possibly can from your excess fun money to put toward a down payment (don't take from your emergency fund though.) The usual rate is 3% down which is usually a couple thousand dollars. This is a bad idea because the less money you put down, the more you end up paying for the house. We put down 20% and we're going to try to put down a little more if we can scrounge up the money.

For example, here is our loan with 20% down on a 30 year mortgage. Compare that to a 30 year loan with a 5% mortgage. Look at the difference in the monthly payments, and, most important - the actual, final cost of the house.

5 % down payment

20 % down

Difference in money saved with a 20% down payment vs. 5% down payment = $36,900

Start looking for agents who specialize in foreclosures. Not all real estate agents deal with foreclosures (the process is a little different) so you need to make sure you tell whoever you are working with that you specifically want to view foreclosed homes. You really do need an agent for foreclosures because the day they come out on MLS, they will probably already have multiple offers in by the end of the day. If you look on your own, most of the houses you find online will already be pending. That said...

All banks have a list of foreclosures that they own. You can call up banks and ask for their list or try to find if they have a web site. For example, Wells Fargo has their own site - Pasreo, but to buy one of their houses, you or your immediate family can't work for them. You can take a look around at their site and get a feel for what's available in your area.

Tomorrow, I will start the second installment of How to buy a foreclosure.

More to come,
Ciao,
Bella