Foreclosure a good deal – not so much

Traditionally, the hunt for foreclosures would seem like a worthwhile pursuit for anyone looking to make a buck in a dreary real estate market. However, it is important to note that not all foreclosures are created equally.

Going back a few years with the rush of frenzied buyers who were getting into properties with little or no many down and many were buying with an option arm mortgage. You remember – those low 1% mortgages that sounded to good to be true. I can remember being in a sales meeting in one of our offices and asking if someone could tell me why anyone would take out this mortgage? The answer came quickly, to keep the payments low and that by the time the rate increased, the market would have gone up enough to cover the principal add on with enough room left over to cover closing costs return a good profit. In order to break even a 25% increase in sales price had to occur – anything less was a loss and anything more was a gain.

Those mortgages were a fantastic party until the rate adjusted and the negative amortization kicked in. Instead of increasing in values, the property values have stayed flat or come down. Most people who tried to refinance found that getting into another option arm was their only option. Faced with owing more than the property was worth, these foreclosures started to appear on the market. Now, tack on the cost to foreclose and you tell me – how good a deal is this?

A foreclosure deal is only as good as the price. No one should pay more for a foreclosure than for any other property – it’s counter intuitive – but it is happening. Forrest Gump would call this “Stupid is as Stupid does”. I would too.

Want to make a real bargain buy in a down market?

Search for properties in good areas where the current owner has equity and it is one of the 3 lowest priced properties on the market and/or are priced lower than the last sale.

Look at it this way, if you needed to sell your house in a down market and understood that the prices are going down and not up- it makes sense that you would look at the last sale and go just below that number – making sure you are among the lowest 3 comparable properties on the market in your area. If that price is below what you owe on your mortgage, you have a problem. But if you owe less than that price – you have some breathing room- and probably will sell your house. Add motivation to the equation and your house becomes a bargain buy.

You need to scour the foreclosures, just like you would scour any other inventory- just because it is a foreclosure doesn’t always make it a good deal.





Filed under Real Estate Practices

6 responses to “Foreclosure a good deal – not so much

  1. Even before I got into real estate I never knew why anyone would take an interest only loan. When a mortgage broker explained to me that it could work for some people it still sounded like you needed a crystal ball to be able to decide if it was for you. That crystal ball was broken, wasn’t it?

    Nice new blog!

  2. realestategenome

    Honestly Maggie, I don’t think so many of these people understood what they were getting into.

  3. Arlyn

    The interest only loans aren’t nearly as horrible as the option arm’s! I would venture a guess that 99% of the people that got into those loans didn’t understand and were never really educated as to how they work.

    Whenever I would get a call for one, I would take the time and explain to them how it worked and then watched as their faces registered the concept. But there are still people asking for this loan! Unless you have buckets of money and are buying the property 20K under value or giving a decent down payment, this is still a vrey dangerous loan!

  4. realestategenome

    Arlyn – I think that many of the loan officers that were pushing this product either didn’t know or didn’t care what the consequences were. For certain people and certain market conditions, it isn’t all bad, but it is a niche loan at best.

  5. Debra

    I believe many of the loan officers were pushing these types of loans to unsuspecting buyers who were trying to buy more house than they could afford.

  6. realestategenome

    Debra – I think you are right, but buyers were more than happy to have had those low payments and pay the piper later.

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