Mortgages

There are still lots of foreclosed homes out there, and they could be your ticket to a bigger, better home than you could otherwise afford.

We’re about halfway through the housing crisis.

About 4 million homes have been foreclosed on since it began in 2007, and lenders are expected to seize and sell about 4 million more over the next couple of years.

But finding the right repossessed home to make your own is harder than you might expect -- and it’s getting harder.

With home prices down more than a third nationwide -- and off more than half in the hardest-hit cities -- you’ll often be bidding against investors who want to turn these deeply discounted homes into rental properties.

A year or two ago, that usually meant a savvy entrepreneur who might own and manage a dozen rental homes.

Now you could find very well find yourself facing corporate buyers who have hired teams of real estate experts to acquire as many as five to seven homes a day.

"The competition for foreclosures is pretty steep," says Douglas Robinson, a spokesperson for NeighborWorks America, a nonprofit organization that promotes affordable housing. "Investors do have an advantage in that they can make an offer and go to closing much faster. They usually have more cash or all cash."

These 8 smart moves can help you beat those investors and buy the right foreclosure for you:

Smart move 1. Never buy a foreclosure sight unseen.

This is the big danger of buying a repossessed home through an auction, especially a foreclosure sale at your local city hall or courthouse. You usually aren't allowed to look inside before you bid.

That means it's impossible to know what shape the home is in until you get the keys. At that point, all of the unexpected costs are yours, and they can run into the tens of thousands of dollars.

Don’t reason, "How bad can it be?"

Frustrated former owners facing eviction have destroyed plumbing and electrical systems, ripped out carpeting, punched holes in walls and stripped homes of kitchen appliances, chandeliers and water heaters.

Look at the kitchen of this foreclosure I recently visited. Even the kitchen island was missing.

It can be truly awful.

So here's the one, inviolate rule of buying a foreclosure: Never commit to a home you haven't thoroughly inspected, inside and out.

Smart move 2. Buy repossessed homes through a real estate agent.

When no one bids, or no one bids enough to cover the outstanding mortgage, the lender that holds the loan gets title to the home.

These become what are known as real-estate owned (REO) properties.

The bank or mortgage company will usually repair the worst damage and hire a real estate agent who specializes to market the home on its behalf.

That selling agent will allow you to see what’s inside so that you know exactly what you're buying.

Smart move 3. Know what it will cost to make the home livable.

Good foreclosed homes are merely houses that have sat empty and neglected for months, with dead lawns, peeling paint and other relatively minor problems.

Others have been so thoroughly trashed that you literally can’t live in them until repairs have been made.

For $300 to $500, a home inspector can help you spot all of the problems and catalog the damage.

The American Society of Home Inspectors or the National Association of Home Inspectors can help you find a qualified inspector in your area.

State laws and regulations usually forbid home inspectors from estimating how much it might cost to fix everything.

For that, you’ll need to get an estimate from a licensed contractor.

A few years ago, you might have had trouble getting contractors to bid on fixing a house you didn't own. Times have changed. Many contractors now will be happy to give you a bid, even before you make an offer on the house.

Build an extra cushion into the amount you think it will take. Remodeling always seems to cost more than you think it will.

Smart move 4. Know what similar homes in the neighborhood are selling for.

You can find the “comps” for the house or condo you’re considering on real estate websites such as Zillow.com.

These are the actual sales prices for similar nearby properties, not asking prices or the estimated values that Zillow creates based on real estate records.

You won’t be able to tell the condition of the homes that recently changed hands, but you will be able to establish a range of prices and an average price.

Don’t put much faith in what Zillow estimates the property you want to buy is worth. Its method for cranking out home values is not that reliable, and Zillow has no idea whether the house is in pristine shape or falling down.

What about hiring an appraiser?

Most buyers don't do that until they’ve made an offer and it’s been accepted.

Even then, “you no longer get to choose the appraiser," says Mary Tootikian, a mortgage broker and author of Stunned in America: Sub-Crime Mortgage Crisis. "Under the new HVCC (Home Value Code of Conduct), all appraisals are ordered through management companies, and they in turn assign an appraiser to do the work."

That’s why any offer you make must include a "subject to" clause that lets you out of the deal if the appraisal comes in for much less than you thought the house was worth.

Smart move 5. Bid low.

The whole point of buying a foreclosure is to get a great price, and bidding low is an essential step toward that goal.

With all the investors searching for deals, you can no longer expect to be the only bidder -- a powerful advantage individual buyers often had in the past.

But you can still take advantage of two things working in your favor:

• The seller (the bank) is not emotionally attached to the home and has no irrational expectations about how much it should be worth.
• The bank or mortgage company still has plenty of foreclosed homes to get rid of. It's losing money every day that house sits there.

Remember that the actual cost of the house is the total of the money you pay the seller and what you'll spend on repairs and renovations.

So take what you think is a fair price for a similar but well-maintained home. Subtract the cost of all repairs, and offer 80% of that amount.

Example: If you think the house is worth $200,000 but needs $30,000 worth of repairs, then you'd bid $136,000. ($200,000 minus $30,000 times 0.8).

If you really like the house, you can increase the bid to up to 90% of its fair market value less repair costs.

But set a firm maximum price, and be prepared to walk away from the table if the lender won't accept it.

Smart move 6. Hire a real estate agent to work for you.

All of this is complicated enough that you could probably use the help of real estate agent.

When was the last time you bought a house? Six years ago? Not since Clinton was president? Never?

She’s out there evaluating homes, tracking down comps, preparing bids and battling with competing buyers every day.

"If you go to make an offer and you don't have representation, you're the fool," Tootikian says. “It’s just like having an attorney in court."

Another good reason to use your own agent: It won't cost any more out of your pocket in the typical arrangement. The seller pays the listing agent, who typically splits the commission with the agent who represented the buyer.

Smart move 7. Arrange buying and refurbishing financing together -- in advance.

Depending on how much work the house will need, you might want to consider a 203(k) loan from the Department of Housing and Urban Development.

It lets you finance the purchase and repairs with one long-term loan. The money comes from a traditional lender, but HUD guarantees it will be repaid, making it easier and cheaper to obtain.

Fannie Mae has a similar program called HomePath that requires low down payments and waives the need for mortgage insurance.

You should start working on your financing before you start looking for a home. "The most important thing is to start working with a mortgage adviser," says Robinson. "Whether you are high income or low income, it makes no difference." Only when you know what you can afford is it time to go look at houses.

Here's our step-by-step advice for finding the best mortgage with the lowest rates and fewest fees.

Smart move 8. If at first you don't succeed . . .

. . . keep looking.

There is no shortage of repossessed homes. Take advantage of what you've learned from your first unsuccessful bid. Take your time, and try again.

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