Investing in Real
Estate
Foreclosures
Are foreclosures a good investment?
A foreclosure property is a home that
has been repossessed by the lender
because the owners failed to pay the
mortgage. Thousands of homes end up in
foreclosure every year. Economic
conditions affect the number of
foreclosures, too. Many people lose
their homes due to job loss, credit
problems or unexpected expenses.
It is wise to be cautious when
considering a foreclosure. Many experts,
in fact, advise inexperienced buyers to
hire an expert to take them through the
process. It is important to have the
house thoroughly inspected and to be
sure that any liens, undisclosed
mortgages or court judgments are cleared
or at least disclosed.
Are there different types of
foreclosures?
Judicial foreclosure action is a
proceeding in which a mortgage, a
trustee or another lien holder on
property requests a court-supervised
sale of the property to cover the unpaid
balance of a delinquent debt.
Non-judicial foreclosure is the
process of selling real property under a
power of sale in a mortgage or deed of
trust that is in default. In such a
foreclosure, however, the lender is
unable to obtain a deficiency judgment,
which makes some title insurance
companies reluctant to issue a policy.
How do I find a foreclosed property?
In most states, a foreclosure notice
must be published in the legal notices
section of a local newspaper where the
property is located or in the nearest
city. Also, foreclosure notices are
usually posted on the property itself
and somewhere in the city where the sale
is to take place.
When a homeowner is late on three
payments, the bank will record a notice
of default against the property. When
the owner fails to pay up, a trustee
sale is held, and the property is sold
to the highest bidder. The financial
institution that has initiated
foreclosure proceedings usually will set
the bid price at the loan amount.
Despite these seemingly
straightforward rules, buying
foreclosures is not as easy as it may
sound. Sophisticated investors use the
technique so novices may find themselves
among stiff competition.
How does HUD affect my buying a
foreclosure?
If you are strapped for cash and
looking for a bargain, you may be able
to buy a foreclosure property acquired
by the U.S. Department of Housing and
Urban Development for as little as $100
down.
With HUD foreclosures, down payments
vary depending on whether the property
is eligible for FHA insurance. If not,
payments range from 5 to 20 percent. But
when the property is FHA-insured, the
down payment can go much lower.
Each offer must be accompanied by an
"earnest money" deposit equal to 5
percent of the bid price, not to exceed
$2,000 but not less than $500.
The U.S. Department of Veterans
Affairs also offers foreclosure
properties which can be purchased
directly from the VA often well below
market value and with a down payment
amount as low as 2 percent for
owner-occupants. Investors may be
required to pay up to 10 percent of the
purchase price as a down payment. This
is because the VA guarantees home loans
and often ends up owning the property if
the veteran defaults.
If you are interested in purchasing a
VA foreclosure, call 1-800-827-1000 to
request a current listing. About 100 new
properties are listed every two weeks.
You should be aware that foreclosure
properties are sold "as is," meaning
limited repairs have been made but no
structural or mechanical warranties are
implied.
You can only purchase a U.S.
Department of Housing and Urban
Development property through a licensed
real estate broker. HUD will pay the
broker's commission up to 6 percent of
the sales price.
Where do you find government
foreclosed homes?
The U.S. Department of Housing and
Urban Development acquires properties
from lenders who foreclose on mortgages
insured by HUD. These properties are
available for sale to both
homeowner-occupants and investors.
You can only purchase HUD-owned
properties through a licensed real
estate broker. HUD will pay the broker's
commission up to 6 percent of the sales
price.
Down payments vary depending on
whether the property is eligible for FHA
insurance. If not, payments range from
the conventional market's 5 to 20
percent.
Buying a foreclosure property can be
risky, especially for the novice.
Usually, you buy a foreclosure property
"as is," which means there is no
warranty implied for the condition of
the property (in other words, you can't
go back to the seller for repairs). The
condition of foreclosure properties is
usually not known because an inspection
of the interior of the house is not
possible before the sale.
In addition, there may be problems
with the title, though that is something
you can check out before the purchase.
Buying directly at a legal
foreclosure sale is risky and dangerous.
It is strictly caveat emptor ("Let the
buyer beware").
The process has many disadvantages.
There is no financing; you need cash and
lots of it. The title needs to be
checked before the purchase or the buyer
could buy a seriously deficient title.
The property's condition is not well
known and an interior inspection of the
property may not be possible before the
sale.
In addition, only estate (probate)
and foreclosure sales are exempt from
some states’ disclosure laws. In both
cases, the law protects the seller
(usually an heir or financial
institution) who has recently acquired
the property through adverse
circumstances and may have little or no
direct information about it.
Can I get financing on a
foreclosure?
One reason there are few bidders at
foreclosure sales is that it is next to
impossible to get financing for such a
property. You generally need to show up
with cash and lots of it, or a line of
credit with your bank upon which you can
draw cashier's checks.
What are trustee sales?
Trustee sales are advertised in
advance and require an all-cash bid. A
sheriff, a constable or lawyer acting as
trustee usually conducts the sale. This
kind of sale, which usually attracts
savvy investors, is not for the novice.
In a trustee sale, the lender who
holds the first loan on the property
starts the bidding at the amount of the
loan being foreclosed. Successful
bidders receive a trustee's deed.
Fixer-Uppers
Is it smart to even consider a
fixer-upper?
It depends. Distressed properties or
fixer-uppers can be found anywhere, even
in wealthier neighborhoods. Such
properties are poorly maintained and
have a lower market value than other
houses in the neighborhood.
Many experts recommend that before
you make such an investment, first find
the least desirable house in the best
neighborhood. Then do the math to see if
what it would cost to bring up the value
of that property to its full potential
market value is within your budget. If
you are a novice buyer, it may be wiser
to look for properties that only need
cosmetic fixes rather than run-down
houses that need major structural
repairs.
Is there a tax break for a
fixer-upper house if it is considered
historical?
Qualified rehabilitated buildings and
certified historic structures currently
enjoy a 20 percent investment tax credit
for qualified rehabilitation expenses. A
historic structure is one listed in the
National Register of Historic Places or
so designated by an appropriate state or
local historic district also certified
by the government.
The tax code does not allow
deductions for the demolition or
significant alteration of a historic
structure.
The U.S. Department of Housing and
Urban Development's Section 203 (K)
rehabilitation loan program is designed
to facilitate major structural
rehabilitation of houses with one to
four units that are more than one year
old. Condominiums are not eligible.
The 203(K) loan is usually done as a
combination loan to purchase a
fixer-upper property "as is" and
rehabilitate it, or to refinance a
temporary loan to buy the property and
do the rehabilitation. It can also be
done as a rehabilitation-only loan.
Plans and specifications for the
proposed work must be submitted for
architectural review and cost
estimation. Mortgage proceeds are
advanced periodically during the
rehabilitation period to finance the
construction costs.
For a list of participating lenders,
call HUD at (202) 708-2720.
If you are a veteran, loans from the
U.S. Department of Veterans Affairs also
can be used to buy a home, build a home,
improve a home, or refinance an existing
loan. VA loans frequently offer lower
interest rates than ordinarily available
with other kinds of loans. To qualify
for a loan, the first step is to apply
for a Certificate of Eligibility.
Are there special loans for
fixer-uppers?
If you need a home loan to buy a
"fixer-upper" and remodel it, look at
the U.S. Department of Housing and Urban
Development's Section 203(K) loan
program. The program is designed to
facilitate major structural
rehabilitation of houses with one to
four units that are more than one year
old. Condominiums are not eligible.
A 203(K) loan is usually done as a
combination loan to purchase a
"fixer-upper" property "as is" and
rehabilitate it, or to refinance a
temporary loan to buy the property and
do the rehabilitation. It can also be
done as a rehabilitation-only loan.
Investors must put 15 percent down
while owner-occupants are required to
come up with only 3 to 5 percent. HUD
requires that a minimum of $5,000 be
spent on improvements.
Two appraisals are required. Plans
and specifications for the proposed work
must be submitted for architectural
review and cost estimation. Mortgage
proceeds are advanced periodically
during the rehabilitation period to
finance the construction costs.
What are building codes?
Building codes are established by
local authorities to set minimum
public-safety standards for building
design, construction, quality, use and
occupancy, location and maintenance.
There are specialized codes for
plumbing, electrical and fire, which
usually involve separate inspections and
inspectors.
All buildings must be issued a
building permit and a Certificate of
Occupancy before it can be used. During
construction, housing inspectors must
make checks at key points. Codes are
usually enforced by denying permits,
occupancy certificates and by imposing
fines.
Building codes also cover most
remodeling projects. If you are buying a
house that has been significantly
remodeled, ask for proof of the permits
involved before you purchase to avoid
future liability for fines.
How do I find a good contractor?
While hiring contractors recommended
by friends is usually a safe route,
never hire a construction professional
without first checking him or her out.
If your state has a licensing board for
contractors, call to find out if there
are any outstanding complaints against
that license holder. Also, call your
local Better Business Bureau to see if
there are any complaints on file.
If you are satisfied with the answers
you find there, interview the contractor
candidates. Ask what kind of worker's
compensation insurance they carry and
get policy and insurance company phone
numbers so you can verify the
information. If they are not covered,
you could be liable for any work-related
injury incurred during the project. Also
be sure that the contractor has an
umbrella general liability policy.
If they pass the insurance hurdle,
next check some of their references. A
good contractor will be happy to provide
as many as you want.
Finally, don't let yourself be rushed
into making a decision no matter how
competitive the market may seem. Also,
never pay a deposit to a contractor at
the first meeting. You may end up losing
your money.
Is remodeling worth the price and
time?
Remodeling magazine produces an
annual "Cost vs. Value Report" that
answers just that question. The most
important point to remember is that
remodeling a home not only improves its
livability for you but its "curb appeal"
with a potential buyer down the road.
Most recently, the highest remodeling
paybacks have come from updating
kitchens and baths, home-office
additions and extra amenities in older
homes. While home offices are a
relatively new remodeling trend, for
example, you could expect to recoup 58
percent of the cost of adding a home
office, according to the survey.
How do I look for fixer-uppers?
You can find distressed properties or
fixer-uppers in most communities, even
wealthier neighborhoods. A distressed
property is one that has been poorly
maintained and has a lower market value
than other houses in the immediate area.
Ascertaining whether the property
you're interested in is a wise
investment takes some work. You need to
figure what the average house in a given
area sells for, as well as what the most
desirable houses in that area are like
and what they cost.
Some experts suggest that buyers who
take this route try to find a "cosmetic
fixer" that can be completely
refurbished with paint, wallpaper, new
floor and window coverings, landscaping
and new appliances. You should avoid
run-down houses that need major
structural repairs. A house price that
looks too good to be true probably is. A
smart buyer will find out why before
buying it.
The basic strategy for a fixer is to
find the least desirable house in the
most desirable neighborhood, and then
decide if the expenses needed to bring
the value of that property up to its
full potential market value are within
one's rehab budget.
Condos, Apartments & Single Family
What are the differences between
condos and single-family homes?
Using appreciation as a measure,
condominiums in some areas have been as
profitable an investment as
single-family homes in the past five
years. And in some markets, condos
appreciated even more, according to some
experts.
While single-family homes have been
the preferred investment by homebuyers,
changing demographics are helping make
condos more popular, especially among
single homebuyers, empty nesters and
first-time buyers in high-priced
markets.
Also, the condominium community has
worked hard in the last few years to
overcome image problems brought on by
homeowners association and developer
disputes as well as all too frequent
construction-defect litigation.
Should I be looking into condos?
While condos never had the kind of
appreciation experienced by
single-family homes in the go-go 1980s,
most ultimately have not lost value, say
some experts. And with high prices in
many urban markets and more single
homebuyers in the market than ever
before, the market for condos is strong.
As with any home purchase, you should
do your homework about the neighborhood
or development before you buy. In the
case of condominiums, it is important to
read the past six months of homeowners
association minutes to see how effective
the board is and to learn about any
possibly detracting issues (such as
protracted litigation with the
developer).
The condominium community has worked
hard in the last few years to overcome
image problems brought on by disputes
and lawsuits. Associations are becoming
more sophisticated about property
management and taking steps to prevent
legal problems and disputes.
Condominiums have held their value as
an investment despite economic downturns
and problems with some associations. In
fact, condos have appreciated more in
the past few years than when they first
came on the scene in the late 1970s and
early 1980s, experts say.
While there are lots of reports about
homeowner's association disputes and
construction-defect problems, the
industry has worked hard to turn its
image around. Elected volunteers who
serve on association boards are better
trained at handling complex budget and
legal issues, for example, while many
boards go to great lengths to avoid the
kind of protracted and expensive
litigation that has hurt resale value in
the past.
Meanwhile, changing demographics are
making condominiums more attractive
investments for single homebuyers, empty
nesters and first-time buyers in
expensive markets.
How do homeowners associations work?
Learn everything you can about the
homeowners association before you buy
into a development governed by one. The
association's financial, political and
legal conditions are very important to
your investment and quality of life.
When run properly, homeowners
associations maintain the common grounds
and keep civility in the complex. If you
follow the rules, the association should
not intrude on your privacy or cost you
too much in association dues.
Poorly managed associations can drag
down property values and make living
there difficult for residents. Start by
studying the association’s covenants,
codes and restrictions, or CC&Rs, and
find out if you can live by them. For
example, if the rules prohibit loud
music after a certain hour and you like
to play your CDs late at night, this may
not be the place for you. Don't move in
thinking you can get away with violating
the rules or change them later because
you may find yourself in turmoil with
determined neighbors firmly in control
of the association board.
Find out all you can about the
association's finances. Beyond reviewing
the budget, talk to the association
treasurer and find out if dues are
expected to increase and if any special
assessments are planned. Ask if special
inspections have revealed problems with
roofs or plumbing that may cause a dues
hike or special assessment later on.
Call and meet with the association
president. If you are the type of person
who despises intrusions into your
private life and the president seems
more interested in gossip about the
residents than maintaining the property,
this may not be the right condo complex
for you.
Speak with residents to get their
views on the association's finances, its
property manager, how it operates and
any politics. Associations are volunteer
organizations with elected boards, like
a mini-government, so politics can enter
the picture and spoil a good thing.
Lastly, take some time to understand
how homeowners associations are
organized and how they conduct business.
Like all real estate investments, the
more you know the better off you are.
Is it difficult to project rents on
rentals?
If you are buying a rental income
property and applying for a loan to do
so, the lender will require an area rent
survey by a certified appraiser. The
amount a landlord can expect to receive
in monthly rent largely depends on what
the property has rented for in the past,
the condition of the building, its
location and the current housing market.
Lenders also look at other cash-flow
considerations. They want to know if you
have enough reserves on hand to cover
predictable and unforeseen expenses,
such as property insurance, taxes,
regular maintenance and repairs.
Vacation Homes
Are vacation homes a good
investment?
You can buy a vacation home today for
investment purposes as well as
enjoyment. And yes, there are tax
benefits.
Some people buy a vacation home to
use as a permanent retirement home
later, which allows them to get ahead on
their payments. Another benefit is that
the interest and property taxes on a
vacation home are tax-deductible.
Some real estate experts predict that
vacation homes will appreciate in value
due to rising demand from the aging Baby
Boom generation. You also can depreciate
the property if you live in the house
less than 14 days a year.
You also need to consider whether you
can afford to carry two mortgages, pay
for the extra utilities and maintenance
costs, and how this investment fits into
your total personal finance picture.
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