My wife and I enjoy our apartment, but we’re preparing for the day when we can make the jump to a house. We could use the extra space, and we’re ready to get away from some of the ticky-tack regulations and rules that landlords love to use.
Financially, however, our preparation is lacking. It isn’t because we’re not trying, but we’ve decided that we’d like to have a sizable down payment and know exactly what we’re getting into. We haven’t had much debt in our marriage so far, and so in some ways, we’re reluctant to dive in.
For this reason, buying a foreclosed home is something that has been very interesting to us. I was first sucked in by hearing radio commercials announcing homes for sale for just $12,000 or $22,000. I naïvely thought, “wow – $12,000? We can swing that. We’ll be in a house in no time!”
Turns out, such was not the case. While properties going for those prices are available, most foreclosed homes can be found going for between 20-40% off the value of the home, according to AOL Money. While this isn’t rock bottom, it’s still quite a bit more affordable than a full-priced home.
According to the same AOL Money article, there are five tips that can make buying a foreclosure a realistic choice for many potential home buyers.
1. Find a property. The article recommends checking two sites: Foreclosure.com and RealtyTrac. Both charge a fee, but they each list thousands of properties. The best places to look are areas that are places that have a high grouping of “distressed properties.” Doing a bit of research about the local economic situation can help as well – you’ll obviously have better luck in areas with more foreclosures.
2. Skip the auctions. At an auction you’re usually buying a home without seeing it first. Before you make any serious offers on a property you’ll want a full inspection, and that’s hard to do with properties that are auctioned off by a court. You may also be responsible for back taxes on the property, something that might not be disclosed during the action. The best thing to do is to wait for the bank to put the home back on the market. They’ll usually pay off any taxes or debts, and fix the home up a bit to attract potential buyers. This is a much safer way to buy.
3. Know local home values. As the article states: “Just because a home is being sold b the bank, doesn’t necessarily mean it’s a bargain.” If you find a property your interested in, use a site like zillow.com to compare values of the homes around it to make sure that you’re not getting ripped off.
4. Get Financed Before You Shop. Apparently many banks won’t make a loan for you to buy a ‘distressed property,’ so it’s a good idea to get pre-approved for a mortgage before you start seriously shopping for home. Other banks base their loan on the condition of the property, so to avoid any problems, get your financing set up first.
5. Get an Inspection. I’ve already mentioned this earlier, but an inspection is key. You want to know as much as possible about a house, and paying for a professional inspection is worth it. Homes in foreclosure can be hiding serious problems, since the previous owner probably didn’t have money to make major repairs, or even perform routine maintenance.
With an inspection you’ll know not only the condition of the home, but what kind of repairs are needed and how much you can expect to pay for them.
While we’re still a while from seriously shopping for a home, we’re planning on checking out foreclosures for sure. Any money we can save on a home would be a leg up financially, and put us that much closer to being debt free again.
What thoughts or experiences do you have with buying a foreclosed property?
The real estate recession doesn’t discriminate. While foreclosures have soared to one out of 84 households over the course of the first six months of 2009 and the Obama administration is considering more aid to help families in this situation, the threat is also affecting famous properties.
The owner of the famous Watergate Hotel in Washington, D.C., Monument Realty, has defaulted on its loan. The lender, PB Capital, wasn’t able to agree on new terms for the loan, and the city’s foreclosure notice expires today according to the Washington Post. The property, made famous by President Nixon, is going up for auction next week.
Are you bidding? I see a lot of potential in this property, despite the fact it has been empty for a while, due to its iconic status. And if I see the potential, there is a good chance a number of savvy real estate investors do as well, driving up the price on the auction block. But who has the money?
Photo credit: brownpau
In the real estate boom, many homebuyers extended themselves financially to buy a house that may have been beyond their means. With the exuberant market, people were encouraged to buy with low introductory interest rates and interest-only loans, the belief that their income would increase to meet their payments, predictions that real estate prices would never fall. As should have been predicted, adjustable-rate mortgages have adjusted and monthly mortgage payments are higher and income hasn’t increased. More people have fallen behind with their mortgage payments.
With declining home prices and interest-only mortgages, more families owe more on their mortgages than their home is worth. Financially, it could make sense, at least in the short term, to walk away. In this state of negative equity, abandoning the mortgage and the house would actually be financially beneficial.
Here is why:
If the house you purchased for $400,000 is now worth only $300,000, but thanks to an interest-only mortgage, you still owe $400,000, your net worth increase by $100,000 simply by wiping the mortgage and the house from your balance sheet. Of course, if this is your primary residence, you still need a place to live. But from this point you could buy a more affordable house or rent for a while.
There is a major drawback to abandoning your responsibilities. If you walk away, you will trash your credit rating, making it more difficult or impossible to rent an apartment, qualify for a new mortgage, and perhaps get a job.
Freakonomics addresses this dilemma (if it is a dilemma at all):
My new wife and I bought our home in Temecula, Calif., as a place for us to start a family… We bought the house in early 2007 for $445,000 and put $50,000 down… Now that the market has crashed in our area, our house is worth about $250,000.
Although our monthly mortgage payments are high, we can still afford to make them, but should we? If we walk away and buy another house with my parents cosigning on the loan (or even just rented a place), we could save almost $1,000 a month in payments and maybe even have positive equity in the next few years. If we stay in our home, we’ll be stuck for many years, and if the market ever does get back to what we paid, the best option we’ll have will be to break even with a sale and then buy another house with an inflated value.
I’m certainly concerned about the ethical side of it, and know that walking away is not “the right thing to do.” But my question is from a purely economic perspective and I’d be saving a significant amount of money by lowering my monthly payments and erasing $140,000 in debt.
What should this family do? Are there ethical considerations, or is it simply a question of math? Credit rating aside, the financially responsible option may be to walk away, accept your mistakes, and start over. But if people can simply walk away from their obligations, what incentive is there for people to buy houses they can afford and work hard to continue making payments responsibly?
New laws are now in place to help families facing foreclosure, which should encourage people to choose options other than abandonment. But they may not help every family that finds itself in this predicament. What should they do?
If real estate is truly the root of the economic recession, then this new proposal from President Obama should help. The plan calls for $75 billion to help 9 million homeowners who can no longer afford their monthly mortgage payments and are at risk for foreclosure.
Here is how this plan would help.
If you owe more than 80% of your home’s value, this plan will help you refinance your mortgage. How will the value of your home be determined? Will they use the purchase price, current estimated market price based on other similar homes sold recently (which could be considerably lower), or some appraised value?
If you’re at risk for foreclosure, the $75 billion would be used to subsidize your mortgage interest rate. This would lower the interest rate you see while the lenders still receive their money from the government. The goal is to keep payments below 31% of income. But what happens when income suddenly drops to zero through the loss of a job? 31% of zero is still zero.
If you declare bankruptcy, a judge will have the authority to modify your mortgage. This is good news for consumers with no other options.
There are a number of other measures that affect lenders rather than consumers. The plan offers incentives for lenders to help at-risk borrowers who are not yet late with payments. $10 million will be set aside to protect lenders against further home price declines.
At this stage, this is just a proposal. The Senate and the House of Representatives will both draw up their own versions of this proposal and eventually agree on a bill. This could take some time, and as sentiment turns away from helping citizens directly, particularly if it is widely believed that homeowners generally find themselves in trouble due to their own choices and actions, there may be a struggle to turn this proposal into an agreed-upon law.
We’ve been discussing Britney Spears’ reported poor financial management strategy lately. A recent court report described her overspending and lack of investment, although this may have been a part of her spousal support strategy. She must have financial advisers on her payroll, right? There must be more to the story.
Nevertheless, I’m not stepping up to Britney’s defense. Several commenters did. Meg says:
For better or worse, she has many streams of passive income that will likely be there long after she dies no matter WHAT she does. Sure, she could be a billionaire or incredible philanthropist if she tried, but she’s not exactly being financially reckless — emotionally and mentally and physically reckless perhaps, but her finances are pretty strong.
Kris agrees:
I’m going to with Meg here… It’s the same reason Michael Jackson will never go broke, despite reports of his overspending. Besides the rights to his own music, Jacko owns the entire Beatles catalog. (He outbid McCartney for it in 1984.) He will never, ever live poorly, since he’ll always collect residuals.
Funny you should mention Michael Jackson. Perhaps jealous with the media attention given to Britney’s finances, Michael’s Neverland Ranch is entering foreclosure due to over $212,000 in missed mortgage payments. We all know he has the income, so why do his financial advisers allow this to happen? Unless they really believe the value of the Ranch is less than what is owed, why would they want to lose this asset due to neglect?
I don’t mean to dwell on celebrities. They’re just normal people with normal problems, but with the added “bonuses” of lots of media attention and lots of money. The media feeds right into our schadenfreude, and we never receive complete information. There is more to these stories we don’t know. It’s fun to draw our own conclusions, especially when situations involve people who seem somewhat less than real.
Michael Jackson Neverland Ranch Appears in Foreclosure Report [Implode-O-Meter]
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