Cover story: How to close on a bargain foreclosure

• Article
• Comments ()
• Click-2-Listen
• Videos

By Michele Lerner

Ms. Mechling says that 203k loans frequently have a higher interest rate than regular FHA loans and that buyers need to be able to qualify for the higher loan amount.

"A 203k loan can be a good opportunity for some buyers, but they need to understand that they must complete the work within a specific time frame and the work must be done by an approved contractor," says Ms. Mechling. "Not all lenders can do a 203k loan, so borrowers should ask about this before beginning to look for a home."

Mr. Henry says that buyers need to consider the costs of improvements to a home when determining how much to offer. If a home is in good condition, they probably should offer full price, but if a home is missing cabinets and appliances, the buyers need to estimate how much these items will cost and factor that into their offer.

"A lot of contractors can give an estimate in the early stages when buyers are looking at foreclosures so that the buyers can build that cost into their loan amount," says Ms. Mechling.

Real estate agents say that home inspections are even more important for a foreclosure than a regular home sale, even though the homes are sold "as is."

"Buyers should have a home inspection by a qualified home inspector so they know what they are buying," says Ms. Mechling. "The bank hasn't lived in the home and won't know how old the furnace is or anything else. If the inspector finds a major problem that can be a deal breaker, then it's worth asking the bank to make a repair. The bank may or may not accept that request, so buyers should never assume anything."

Ms. Flournoy recommends having a home inspection performed as early as possible and says that buyers can make their offer contingent on a satisfactory home inspection, although not all banks will accept that contingency.

Buyers in recent years have been able to request closing cost assistance from many sellers, and banks will sometimes provide this help for foreclosures.

"Banks will contribute to the closing costs for some homes up to a certain percentage, especially if the buyer chooses to use that same bank for their mortgage," says Mr. Henry. "Typically, buyers can expect to get about $5,000 in closing cost help."

Multiple offers can create a frenzied situation for foreclosure buyers so they should be aware of the potential for overbidding.

"Buyers should bid to win if they know others are out there bidding, but they should also remember that there are multiple other properties coming on the market all the time that may be just as appealing to them," says Mr. Henry.

Ms. Mechling also warns that foreclosure buyers should be even more careful than other homebuyers to make sure they have emergency cash reserves.

"Foreclosures can sometimes be more prone to unforeseen expenses such as a furnace needing replacement or leaking pipes because the house has been often been empty and the banks won't know about the same issues as homeowners do," says Ms. Mechling. "Buyers need to do a financial reality check and make sure they are not setting themselves up to fail by not being prepared for the expenses of homeownership."

"Buyer beware" should be the mantra for all homebuyers, but the phrase has particular resonance for buyers of foreclosures.