Home buyers might want to think outside the box by purchasing a home in foreclosure. It can either be a long-term investment and a place to live in or rent or to flip after fixing it up.
But it’s not without its special challenges, says Warren Reeder, a third-generation Realtor with his family-owned business, Reeder Cos., has purchased several foreclosed properties, fixed them up and then resold them in Hammond.
“My first home I purchased was a foreclosure,” says Reeder, who has a master's degree in Business Administration from Indiana University Northwest. “Because most foreclosures are sold as-is and they require extensive repairs, you cannot use a normal Federal Housing Administration and Veteran Affairs or conventional loan to purchase a foreclosure.
"FHA offers a rehab loan product for $203,000 that allows you to purchase the home and have up to $35,000 to do repairs. It was an extremely stressful process but in the end, I had a completely remodeled home to my taste and a good amount of immediate equity. After that, I was hooked on helping other people purchase foreclosures and fix them up.
"I recently just finished my first flip in Hammond near Purdue Calumet and just started on a gorgeous historic home near Forest Avenue in Hammond.”
Reeder stresses that for those considering such a purchase, working with a Realtor who is knowledgeable with foreclosures helps navigate what can be a confusing process.
“Because foreclosures are typically priced below market value, you often have much more competition when submitting an offer,” he says. “Having an experienced Realtor that knows the market can determine whether or not your offer gets accepted.
"For example, most buyers wouldn’t fathom offering above the asking price for a home, but banks often price homes aggressively below market to garner immediate interest from a large number of buyers so it sells quickly. I recently had a client offer $65,000 on a $45,000 foreclosure.
"Her offer was accepted, and she immediately felt she offered too much. She has since closed and put about $10,000 into improving the home. I emailed her last week with comparable homes that have sold in her neighborhood, and she could sell her home tomorrow for ($95,000) to $105,000. Had we not offered what we did based on comparable sales and improvements needed, she might not have had her offer accepted and wouldn’t be sitting in her dream home with 25 percent equity.”
Reeder notes there are many other variables that a Realtor can anticipate that a buyer may not, such as a title search may not cover past due water bills.
“On several occasion I have called the water department a few days prior to closing and discovered $500 or more bills from previous owners that the buyer would’ve been responsible for paying after closing,” he says. “Buying any home can be tricky, but foreclosures often are the most difficult to purchase and a Realtor can help make the process much more smooth and lucrative.”
The difference between buying a foreclosure and other properties doesn’t differ in many ways — it involves negotiating the contract with the seller, having a professional home inspection done, having it appraised by the lender (if it involves financing), and closing. But variables like foreclosures being sold as-is, not having utilities activated, dealing with a seller from a corporate bank in another state and the potential for liens to come up in title searches are what often cause delays and frustration during the process.
“If you asked my clients who purchased a foreclosure if they would want to do it again, most would probably say no, but they are also sitting on 15 to 35 percent in immediate equity,” Reeder says. “I remind them it’s worth the month or two of frustrations and they almost always agree.”
Before deciding whether to buy, a person needs to understand that there is almost always more stress involved.
“So mentally you have to be prepared for a roller coaster ride of emotions,” Reeder says. “If you are engaged and planning your wedding, pregnant, doing night school on top of your full-time job, it may not be a good idea to add any unneeded stress to your plate.
"But at the very least, you should keep that option open if a good opportunity presents itself. Also keep in mind that not all foreclosures are in need of remodeling and can be move-in ready. Some banks are doing necessary improvements prior to listing the foreclosure so it will pass FHA/VA/Conventional appraisal guidelines.”
For those looking to flip, remember not to remodel with your own personal tastes but instead keep it neutral. Also, don’t cut corners but don’t over improve either. Create a budget and stick to it.
“If you want to buy a foreclosure using a rehab loan, make sure you have a combination of a great Realtor, lender and general contractor that are all experienced with this type of loan,” Reeder says. “Most important of the three is the lender, as only a few in Northwest Indiana actually service this type of loan and have experience doing it. Lastly, don’t be fooled by the shows you see on HGTV, it certainly isn’t as easy as they make it look. But if you’re up for a challenge, buying a foreclosure can be a great way to invest.”