Expert: Jessica Bryan - 7/19/2004

Question
Dear Jessica,

    I have never own a home (and nobody from my immediate family has either).  Based on my great credit but low income I can qualify for up to $300,000.  Unfortunately that amount in Southern California (my current location) is not enough even for a shack!  

    Recently while browsing the web inadvertently I did a search for foreclosure listings in my area.  I was surprised to see a house with six bedrooms and five bathrooms with a price of $140,00.  I have done some reading and now I know what a Notice of Default is, What's an REO, and the difference between pre-foreclosure and a foreclosed home.

    Would you recommend for a first time buyer such as myself to buy a pre-foreclosure or a foreclosure?    Are the final prices for foreclosed homes really that much lower or is it all a mirage?  How would it benefit me to enlist the assistance of a Real Estate Agent?  What would his/her duties be (compared to those duties under a regular purchase)?

    In advanced, Thank you sooo much for your assistance and prompt reply.

Kind regards,
Michael

Answer
Dear Michael;
Buying a foreclosure (not a pre-foreclosure)is the best bargain because usually the bank is eager to get the home off their hands and will sell it at a loss.  A pre-foreclosure is not as good a deal because there are creditors to pay off and no one wants to take a loss. Since the foreclosed homes are usually in bad shape and need work done on them (I say usually because there are some exceptions to this such as cases of divorce)you will probably have to either hire someone or do the work yourself (if you are handy) to make the home habitable. If you do your homework, and make sure that you are aware of the resales in the neighborhood--how long it takes to sell a home, what the prices are, and what has sold recently, then you should be okay. Using websites such as www.comania.com or www.realtor.com can be useful tools to get information. Be careful though.  Make sure that you know who the neighbors are and any information about the neighborhood (such as crime, etc.) I caution you, since this is your first home and you will be living in it.  You will want to be happy in the home and feel safe in your community.  I am always a little suspicious when a home in a hot market goes into foreclosure. Why couldn't the owners sell it and get out of debt before the bank foreclosed?  Ask these questions and be sure that you fully understand what you are buying.  Remember too that the price of the home reflects the fact that it couldn't sell at its full value.  There could be all sorts of problems with the home.  It may need new plumbing, a new roof, etc.  Sometimes, people who can't afford expensive repairs and who are having financial problems allow the house to run down and maintenance to be deferred.  They figure that there is no need to spend money on the house if they are going to lose it anyway.  So, when you look at a low price tag, you have to calculate the cost of repair as well.

A real estate agent may not be able to be of too much assistance unless you contact one who deals in foreclosures and knows about them. Most agents have never had a foreclosure and don't understand the legal aspects.  Foreclosures seldom make it to Multiple listing service and therefore, agents don't know about them.  Finding a foreclosure will be your task and may take some effort.  (I know that where I live, there are very few.) The usual duties of an agent are those of advice, providing a history of resales in a neighborhood, overseeing inspections, helping construct and presenting an offer and dealing with the myriad details of a closing.  I seldom suggest that a first-time buyer attempts to purchase a home on their own, but in this case, there is much less for the agent to do.  You will be dealing with the bank directly.  There are not the usual disclosures, and the home will be sold 'as is' so there won't be the same inspection issues.  Since you will be using an escrow agent to do the closing, you will not even need a lawyer.  The bank will talk to you and provide you with the information you will need to proceed and if you find that you are confused by anything you can always call an agent, offer a small fee for consultation and use the agent in a limited capacity.  (I would try offering about $300 to get an agent's assistance for a couple of hours. But make sure that you get someone who has been in business for at least 10 years so they know what they are doing and advising.)

Good luck and best wishes.

Sincerely,
Jessica Bryan
Managing Broker
House to Home Realty Services