Time to Buy a Foreclosure?

So is now the time to buy a foreclosure? The answer with a caveat is, "yes". The caveat? A foreclosure is not for everyone.

Here are 10 questions to ask yourself to help you decide:

1. Do you have financing in hand? Speak with lenders and give them tax returns and other documents to get pre-approved for a mortgage before looking at houses. Ask about fixed-rate loans that can serve as a hedge against inflation — if rates go up you're safe, if rates go down you can refinance.

2. How's your local market? Is the inventory of unsold properties increasing? What percentage of homes on the local MLS have either been foreclosed or are distressed? The general rule is that the bigger the foreclosure percentage the bigger the foreclosure discount. Speak with local brokers for specifics.

3. Are new home builders discounting units in established projects? If so, that's good news for new buyers — but bad news for previous project investors. In general terms, less new construction means more housing demand if the local population is growing.

4. What are the rental rate and vacancy trends in your community? In some situations home prices are falling but rents are going up. This is happening because while homes are cheaper, many would-be buyers can't get financing so unit sales are dropping. At the same time the number of potential renters is expanding — in part because people have been foreclosed and now need to live somewhere.

5. What foreclosures are available in your area? Check the RealtyTrac listings for details. You may be surprised at the number of available properties in even the most expensive areas.

6. Can you do your own repairs? Some of your own repairs? It always pays to have good relations with licensed trade people such as plumbers, electricians, home inspectors, pest control companies and contractors. With some properties it may make sense to partner with a professional.

7. Can you afford vacancies? What about monthly losses if the rent is less than expenses? Don't fall into a cash flow trap, make sure you have enough dollars to comfortably acquire property, fix it up and hold on over the long term.

8. Will foreclosure owners such as banks, credit unions, and insurance companies provide financing? In some cases the answer is yes. In other words, when considering foreclosures see if purchases can be seller financed — even if the “seller” is a big institution.

9. Would it make sense to buy a foreclosure as a residence and then rent out your current home?
Lenders are now instituting new rules that constrict such plans. As one example, the FHA recently introduced a buy & bail rule designed to prevent owners from buying new homes and abandoning old ones. Under the new standard you will likely need a lease, deposit and a month's rent before you can get an FHA loan for a replacement property. The problem is that it may be impossible to meet such new requirements until the original property has actually been vacated and prepared for tenants. Look for private-sector lenders to adopt similar rules.

10. What do local laws say? New regulations in many states have been designed to prevent the abuse of those facing foreclosure. While well-intended, some of these regulations are very broad — and they include stiff penalties. Work with local brokers and attorneys to stay within the law and avoid the pitfalls and penalties created by these new state regulations.