San Diego Real Estate Blog

You want to buy a foreclosure? Remember, there are both great opportunities and great pressures and pitfalls in this market.

First, you have to decide at what stage of foreclosure you want to buy. There are three options: 1. pre-foreclosure; 2. sheriff’s auction; 3.

“The safest and best way to buy is when it’s a bank-owned property,” said Rick Sharga, a spokesman for RealtyTrac, the online marketer of foreclosure properties.

Pre-foreclosure: These homes are in the foreclosure process, but they have yet to be sent to auction. Owners are typically trying to unload them because they are “underwater,” owing more on the homes than they are worth.

As a result, potential buyers must negotiate a deal with the lender as well as the owner. That makes buying at this stage of foreclosure complicated and slow. But, you have the advantage of being able to inspect the home before purchase — which isn’t the case in other types of foreclosure sales. Sharga warned, however, that prices are usually higher than at other stages of foreclosure.

Sheriff’s auction: These sales yield the lowest prices, but they are fraught with difficulties. Often the house is unavailable for inspection, leaving buyers with a long list of expensive repairs — and much larger bill than they intended. This stage is usually best left to the professionals, the contractors and investors who regularly bid on these places and know what they’re doing.

Repossession: This occurs after the home has gone through a sheriff’s auction but does not sell and the bank gains possession of the property. Homebuyers may not get the best bargains during this stage, but they can nearly always perform a thorough inspection before closing, minimizing costly surprises. Plus, the property comes with a clear title.

In addition, the banks selling these places may extend preferential financing terms to the buyers and may have made some repairs before putting the property on the market.

Even in this safer stage, though, homes are still sold in “as is” condition. That means the bank won’t pay for cosmetic issues. Although, they will often pay for some or all of repairs that are health and safety issues. That makes the home inspection even more critical. You do not want to buy a bank owned or really any home for that matter, without paying for your own home inspection.

Since you’re buying from a corporation, not an individual, the buying process can be faster, so be prepared to move quickly. Many times a listing goes on sale on a Friday and is sold over the weekend.

Having your financing in order for a quick purchase is very attractive to banks. Buyers and their agents need to be on top of everything from the inspection to the financing. Some banks will even give you discounts for closing quickly. On the other hand, they may charge a per diem fee for late closings.”

Once you’ve decided which type of home to buy, there are several common mistakes foreclosure buyers should take care to avoid. These include:

Getting caught up in a bidding frenzy: The banks often under-price repossessions, hoping to generate excitement, attract multiple bids and sell them quickly. The problem is, as in any auction-type sale, bidders get excited and pay too much.

There are 800,000 REOs in the banks’ inventories. There’ll be another home to bid on tomorrow. At the same time, low ball offers are often scoffed at. A good agent should be able to show you comparables to make a strong offer.

Underestimating repair costs: Take full advantage of the home inspection and don’t delude yourself about how much the repairs will cost.

In some cases where a lot of work is required, take along someone who can give you a good estimate of how much repair costs will come to.

A good rule of thumb would be to factor in a cushion of 10% to 20% of the purchase price to pay for unexpected repairs. If you end up not using it, go on vacation after 6 months.

Buying in a neighborhood flooded with foreclosures: This is most important for people buying for the short-term. Any neighborhood saturated with REOs and foreclosures may be headed for further price falls. If you’re planning to relocate within a few years or buying a bigger house, that could mean selling at a loss. A better bet, if you can find it, is to buy the only foreclosed home in an otherwise stable community. That’s more likely to hold its value.

According to the Census Bureau, new home sales improved in March at the fastest single-month rate in 47 years. New-home sales rose 26.9% to a seasonally adjusted annual rate of 411,000 last month, compared to an upwardly revised annual rate of 324,000 in February.

The March sales were the strongest since last July, and the percentage gain was the biggest on a month-over-month basis since a 31% gain in March 1963.

New-home sales spiked in every region of the United States. The South saw the biggest jump in new home sales, up 43.5%, while the Northeast region saw sales climb 35.7%. The West and Midwest regions both saw single-digit percentage growth, with the West up 6% and the Midwest up 4%.

The Census Bureau data followed a report from the National Association of Realtors on Thursday that showed existing home sales soared nearly 7% in March, as new homebuyers raced to buy up properties before a tax credit expires on April 30.

The Census Bureau estimated that 228,000 new homes hit the market in March. At the current sales rate, it would take 6.7 months to sell through that inventory, down sharply from an estimated 9.2 months of inventory in February.

While things are not great, a firming housing market and improving jobs market (experts are predicting unemployment for April to be a still high 9.6% compared to 9.7% for March) shows we are heading in the right direction.

One thing I am asked often by clients and other agents is the impact of Foreclosures, short sales and died of lieu on credit scores. If you’re delinquent on your mortgage, your credit score will suffer. Everyone knows that. The question is, by how much?

Until recently, those answers were hard to come by. Credit bureaus were uncommunicative about expressing, in points, just how much impact different foreclosure types of mortgage delinquencies have on scores.

Recently, Fair Isaac, which developed FICO scores, pulled back the curtain a bit, revealing some estimates of point-score declines following mortgage delinquency problems.

Here are the average hit your credit will take:

30 days late: 40 – 110 points

90 days late: 70 – 135 points

Foreclosure, short sale or deed-in-lieu: 85 – 160

Bankruptcy: 130 – 240

To come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a fair-to-middling score of 680 and the other with a very good one of 780. (FICO scores range from 300 to 850.)

The hypothetical person with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records.

See the chart above to see how each scenario affected each borrower.

One reason credit companies were so closed-mouthed is that they often can’t definitively state how much each delinquencies will affect scores because there are too many variables.

Some borrowers will fall much more steeply than others for the same payment problem. Picture someone who has just one mortgage and one other credit account.  If they miss one payment that would impact their scores a lot more versus a mature credit user with 15 accounts, one missed payment would just be a blip.

The point loss also depends on the borrower’s starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.

It gets worse when you face foreclosure, depending on whether you lose your home through foreclosure, short sale or deed of lieu.

Credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important thing is that it’s reported that you paid less on a settled account.

Some borrowers may think that because they never missed a payment, they can “walk away” from their homes with relatively little impact on scores. Not true. When a deed-in-lieu or short sale is reported as a partial payment, it’s treated as a serious delinquency just like a foreclosure.

Even if borrowers made payments faithfully for years before short selling or doing a deed-in-lieu, their credit score will still take a hit. The total decline will run about 85 points for the 680 score borrower to as much as 160 for the 780 score.

Buying a home is the biggest purchase most people will ever make, yet many go into it blind. Here are some common — and costly — mistakes homebuyers make.

1. Not knowing your credit score

If you’re even toying with the idea of buying a home, you must find out exactly what your FICO score is. If you find it is less than ideal, wage a systematic campaign to raise it. Too many borrowers ignore this step and get surprised when they get interest rate quotes. For a buyer with a credit score between 680 and 700, the fee comes to 1.5% of the mortgage principal. On a $200,000 mortgage, that adds up to $3,000. Someone with a 740 score pays nothing. Lower-score borrowers also get saddled with higher interest rates, about 0.4 percentage point more for the below 700 borrower. That costs an extra $62 a month — $744 a year — on a $200,000, 30-year, fixed rate loan.

2. Buying a car before a house

Anytime consumers open new credit accounts — credit card, auto loan, etc. — their FICO score could drop, according to Craig Watts, a spokesman for Fair Isaac, the creator of FICO scores.

“Hence the admonition to not open other new accounts while your mortgage application is in process,” he said.

A big purchase would use up a considerable proportion of a borrower’s total credit limit, which results in a drop in the score. Lenders often continue to check credit scores in the weeks before closing.

3. Skimping on a home inspection

Buying a pig in a poke can cost buyers big bucks — just when they can least afford it. So It’s vital to find all the costly flaws before you buy.

A home inspection can find problems with the foundation, electrical, plumbing, roof, attic insulation, and heating and air conditioning. In some states, separate licensed inspectors offer mold or termite inspections.

Often homebuyers, who may be strapped for cash, stint on inspections and look for the cheapest way to go. That can lead to disaster.

4. No contingencies

When signing a sales contract, buyers usually have to put up 1% to 3% in “earnest money,” which they don’t get back if they pull out of the deal except under certain conditions spelled out in the contract.

Sellers try to limit the grounds for canceling, and inexperienced buyers may sign contracts that don’t include common exceptions, such as uncovering major problems during the home inspection, failing to obtain financing and failure of the house to appraise.

Failure to obtain financing is common these days because lenders have become very picky; underwriting is very strict.

Even if your mortgage company is still willing to finance your purchase, the house itself may be worth less than you’ve contracted to pay for it, and the lender will pull its approval.
Losing a deposit of $2,000 to $6,000 on a $200,000 home hurts.

5. Not budgeting for insurance

Don’t underestimate insurance costs and fail to budget for them.

Many homebuyers don’t understand just what is — and what is not — covered. Standard policies pay for theft and wind, fire, lightning, hail and explosion damage. Not covered is flooding, earthquake damage or problems caused by neglect of routine maintenance.For flood insurance, most buyers use the National Flood Insurance Program. Earthquake coverage may be available through a state authority or some private companies. Depending on location, flood insurance can run into a lot of money. The cost of $250,000 worth of government flood coverage on the building and $100,000 of its contents can go as high as $5,714 in high-risk, coastal areas.