Wednesday, June 11, 2008

Buying (or trying to buy) a Foreclosure/REO in 20 easy steps

It's the Real Estate Game, Kiddo!

OK, that's not how I speak, but it makes my point. 2008 has brought some amazing opportunities for anyone looking to buy real estate - virtually anywhere in the country. Forget the gloom and doom headlines - I'm not buying it. Why? Because my phone and email are full of folks ready, willing and able to buy - and it's my pleasure (and my passion) to help them.

The past year has been great in separating the real estate agents who "sort of" work in this profession, and those of us who devour it. I must say I fall into the latter category. But enough about me - I want to talk about you.

The number one thing you need to know, and that I will tell you during our first conversation, is that you have to MANAGE YOUR EXPECTATIONS. Unless you are buying a home directly from the homeowner (known as a "fair market sale"), you most likely will be buying an REO (Real Estate Owned), also known as a foreclosure (although REO is the right term.)

Nothing about buying an REO is "normal." This segment of real estate has its own quirks and peculiarities, and if you're not forewarned, it's not a pleasant surprise. I will be addressing the issues that face buyers in Las Vegas, although I'm sure this is happening elsewhere also.

Here's the process you will most likely go through during the home-buying purchase:

1 - Get pre-qualified by the lender of your choice. You will learn how much of a home you qualify for. Also be sure to ask what the monthly payment is on that dollar amount. It may be more than you're willing to spend or afford after you add an HOA payment, real estate taxes - and inconsequential things like food, gas, insurance, clothing, etc.

2 - Choose a Realtor you feel comfortable with or that was referred to you with REO/foreclosure purchasing experience.

3 - Tell the Realtor all the features your dream home has in it, as well as the areas of town you're interested in. Make sure you know which features are "deal-breakers." In other words, things you MUST have (RV parking or no HOA or master downstairs, etc.)

4 - Your Realtor will put together a list of homes and you'll start looking in person.

5 - You find a terrific home and want to put an offer on it immediately! (THE FUN ENDS HERE.)

Steps 1-5 are the same whether you buy a fair-market home or REO. Now we enter the Twilight Zone of REOs.

6 - The "seller" - meaning the bank that owns the property states in the listing that you must be pre-qualified by their bank. What? You don't want your credit run again. Sorry - these are the "rules" and your offer isn't getting submitted without the right pre-approval. (I don't want to spoil the surprise, but when you don't get this home and start the process again, you'll have to get pre-approved by yet another bank!)

7 - All your friends, family, the media, tell you this is a buyer's market and you have to put in a lowball offer AND ask for closing costs, a home warranty and a repair allowance. (The reality is that if the listing is 1-3 days old and is in good condition or better, I can with almost 100% certainty tell you there will be multiple bids, above asking price and the winning bid will not ask the seller for concessions.) So the question is, how much do you really like this house?

(Unfortunately most buyers want to try it their way the first few times, and after consistently being told they're a backup offer - if there's any communication from the seller's agent at all - they start to take some professional advice.) Your Realtor should be very patient and understand what you're trying to accomplish. Remember, they're on your side and watching out for your best interests at all times (or should be). If you don't get that feeling, find another Realtor.

8 - Your agent has submitted your offer and now you wait for the answer. You LOVE this house, so you're really antsy about finding out if you've got it. A day goes by, then another, then another. It's a week (oh, this is ridiculous!) - Mr./Ms. Realtor, pick up the phone and see what's happening!

The truth is the listing agent is waiting for a response from the bank - and they've got no control over how fast the answer comes. In many cases, however, the listing agent did get the answer, and only told the "winning" bidder. So it's up to your Realtor to check the MLS daily to see if the status changes from available to pending/contingent.

So let's say you didn't get the winning bid. Now you start over again at step 6, and repeat for as many times as necessary to get to step 9.

9 - Your bid is accepted! Congratulations, but don't start chilling the champagne yet. You will now get to sign a bunch more documents (counter offer addendums - even if the bank accepted all your terms.) You should read all the addendums, and have your Realtor explain them. A lot of the terms won't make sense until down the line when you balk at the process. The addendums are the CYA (cover your as*) for the bank. After you sign the papers, start doing your due diligence.

10 - Due diligence is everything you need to do to make sure that you're happy with the property, the rules and regulations, the lender, etc. If you haven't already put your full loan application in - do this NOW! REOs will not close in 30 days, but when the seller is ready, you better be, too.

If you're planning on moving (or have to move) within 30 days, find temporary housing. Tears, pleas of mercy and anything else you resort to will fall on deaf ears in the seller's agent's office.

While you're getting your loan documents together (really this should be done already), your Realtor will order and you will pay for a home inspection ($200-500, depending on the size of the home and the scope of work done.) Hire a professional as their report will be needed later on and they see things you never will think of looking for.

If you're purchasing a home in an HOA (Homeowner's Association), you will have to review the CC&Rs (Conditions, Covenants and Restrictions). Here's a little bump in the road - many REO listing agents say they will not order the HOA resale package. Make sure your Realtor knows that by law the listing agent must order the package. They will probably make you pay for it, though. This runs between $100-250, and is most likely a non-reimbursed expense. Once you receive the package, you have 5 days to review all the documentation, and if there's something in there you can't live with, now is the time to terminate the agreement.

The same thing goes for your home inspection. If something comes up in the report that you are unprepared for (mold, roof issues, etc.), this is your opportunity to get out of the deal without losing your earnest money.

11 - Did you request a repair allowance in your offer and it was approved? If so, most banks require you to make the repairs (another out-of-pocket expense for you), and submit your receipts for reimbursement at close of escrow.

12 - Did you request a home warranty and it was turned down? Don't feel bad, almost all banks will not purchase a home warranty for you. A GIANT word of caution. If your home inspection report shows the A/C is not working, don't expect the home warranty to cover it once you move in. They will ask for the inspection report (or final walkthrough paperwork) to see that it was operational before close. ALWAYS BUY A HOME WARRANTY - enough said about that.

13 - Ah, lucky 13. Did you qualify for an FHA mortgage? Of course you did! It's only 3% down, lower MI (mortgage insurance) and easier to qualify for. Let me tell you now before you put in an offer on the "home of your dreams" - there must be a working stove, the plumbing must be in working order, the HVAC (heating and A/C) must be working, and if there's a pool - it, too, must be in working order. If not, the FHA appraiser will NOT give you a final appraisal, and you can't close on the house. Of course your Realtor already has told you this (but just in case.) And here's a bonus secret for FHA homebuyers - the MINUTE you know you're going FHA, have your Realtor ask your lender for the FHA Amendatory Clause. This one piece of paper is signed by you, the buyer, your Realtor and most importantly, the seller. I'll tell you right now, get it in early and have your Realtor ask again and again for the signed paper back. For some strange reason, it takes forever.

14 - Ok, you've done your inspections, you've read all the documents, you've gotten the green light from your lender and locked your rate - let's get this puppy closed! Actually, you've got a 50/50 chance of that happening quickly. Make sure you've submitted your receipts to your Realtor if you're getting reimbursed for repairs, make sure you have a current photo ID (driver's license is best), as you can't sign your paperwork without it. Make sure whatever money you need for closing is available to be turned into a cashier's check or money order.

15 - Once your lender has everything they need, they will transmit or overnight the loan docs to the title company. Title will review the documents and "figure the file." This usually takes 24 hours. The title company will produce an estimated HUD-1, which is all the credits and debits that the buyer and seller will be paying at closing. The title company should send this to your Realtor, so they can review it for accuracy. This also gives the exact amount of money that you, the buyer, will need to bring to closing.

16 - Now title will set your date and time to sign your paperwork. If you live locally, you will go to the branch where the escrow officer is located. If you live out of town, you can have a mobile notary bring the paperwork to you, but be prepared to pay $150-200 for this luxury.

17 - Did you remember your driver's license? Good. The signing takes about 1-2 hours, depending on how many questions you ask. ASK EVERYTHING YOU WANT - this is your purchase and there is no such thing as a stupid question. Really. Most escrow and title officers are very patient and usually explain everything in adequate detail so you don't need to ask much at all. Once you are done signing, title will overnight or fax your loan documents back to your lender. It can take anywhere from 24-72 hours for the lender to "fund" the loan - meaning sending the money to title.

18 - The seller has to approve the final HUD-1. This may take an hour to 24 hours. Once this is done and your bank has funded, and you've paid what you owe, if anything, the paperwork will be sent to the County Recorder's office to be recorded. Right now recordings are done twice a day, and the cut-off is usually 1pm. If you miss the cut-off, there's always tomorrow (unless it's Friday, then you have to wait until Monday.) Until the home records and the title company calls your Realtor with the good news, you can't get the keys or move in. (Yes, I know the keys are in that little box on the front door, but you can't have them until the home is legally yours.)

19 - The home records! Congratulations! (Where did we put that champagne bottle? It's been so long I've totally forgotten!) Now the real work begins. Make sure all the utilities are in your name - do this quickly as sometimes the sellers pull the switch immediately (although they aren't supposed to.)

20 - CHANGE THE LOCKS! Everyone in town has been in your new home, and the key may have been copied endless times already. Call the locksmith now! Once this is done, start moving in and enjoying your new home. You deserve it.

If you'd like to avoid any of the pitfalls of buying a new home, Mark Karten is available to protect you every step of the way. Best of all, it costs you nothing! You can contact Mark at or visit his website, for more information on all the current foreclosures (and regular homes, too) available in Las Vegas.

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