Buying a home is always a challenge. Buying a foreclosed home presents unique challenges, however. You need to be willing to hunt, put up with lenders who offer surprisingly little information about the properties they’ve taken back, real estate agents who have little experience or incentive in selling foreclosed homes, and loan officers who demand nearly perfect credit ratings to obtain a loan in today’s tight-fisted market.

Foreclosed properties are typically referred to as REOs (real estate owned by the lender), according to FindLaw.com, a leading online resource for legal information, and are owned by the lending institution or government agency that backed the mortgage. For one reason or another, the owner failed to make payments on the loan and the lender foreclosed on the property (repossessed it).

Banks and other home-lending institutions are not in the business of owning property. They’re in the business of making money on the money they lend. So it’s in their best interest to sell a foreclosed property, and they are often anxious to do so. Properties of all types, including single-family homes and condominiums, can be foreclosed. Depending upon local regulations and traditions, some lending institutions will sell their properties through real estate agents who specialize in REO properties, while other institutions will sell foreclosed properties through auctions conducted by a county sheriff.

Because of the volume of foreclosed homes currently on the market, a growing number of lenders have turned to selling properties through heavily advertised public auctions in which dozens or sometimes hundreds of properties are sold in one or two days. The Federal Housing Administration (FHA) has sold foreclosed properties through local auctions for many years, typically announced in the classified sections of local newspapers. Potential buyers submit bids on the day of the auction, accompanied by a certified check for a percentage of the bid price. The highest bidder usually gets the home.

Buying a foreclosed property can be risky if you are not familiar with the procedures involved. Such a sale may not include the safeguards that are present in a traditional sale, such as a lender and a title insurance company. Therefore, if you plan to buy foreclosed properties, says FindLaw.com, it is important to familiarize yourself with the process and consult with a lawyer who specializes in this area.

Here are some tips to buying a foreclosed home:

Not all foreclosed properties are good deals. It seems like foreclosed properties are everywhere these days; however, not every property is a smart purchase. Search for a foreclosed property as if you were buying a home in a hot market. Start by researching neighborhoods that you really want to live in, then get in your car and drive through the neighborhood looking for properties that aren’t kept up as well as neighboring properties.

Find an experienced real estate agent. Some sellers of foreclosed properties, including lenders that have repossessed a property, may refuse to work directly with the buyer. Find a real estate agency that has experience in dealing with foreclosures and is willing to represent you.

Tour and inspect the property. It’s vital to inspect any property before buying it, but it’s absolutely critical when buying a foreclosed property. Many foreclosed homes are not kept up or have been abused by their former owner and may require thousands of dollars in repairs and maintenance. If the property is located in a neighborhood with a lot of potential, investing to rehab a property may be worth the money.

Have your financing lined up. Over the past two years, many lenders have tightened their lending standards and are only offering loans to those who have solid credit ratings and the long-term means to pay for a home. Sellers of foreclosed properties are leery of buyers who don’t have their financing together. Like buying a home at the top of the market, it’s in your best interest to offer the most solid financial package in order to win the home you want.

Ask your lender about 203K loans which allow you to borrow more than the purchase price to pay for necessary improvements.  Many foreclosures have been vandalized and damaged from sitting empty and may require a lot of work.  The 203k program allows you to build in money to get the home livable.

To learn more about buying foreclosures, and to get help with evaluating and buying foreclosure.  Contact us at 661-836-1099 or 661-204-1925.  We have agents and lenders experienced in buying foreclosed homes.

So what does that mean?  Is this a time to buy?  I don’t think that anyone is saying it’s not.  Gary Crabtree’s comments mean that we shouldn’t buy expecting that rapid appreciation everyone got excited about between 2003 and 2006.  Expect to buy your house and keep it for awhile.  It’s back to fundamentals.  Buy good values and keep them. As a homebuilder, I am telling my clients that now is the time to be building.  Lot prices are lower than they have been in years, construction costs are still low, construction lending is starting to soften, and there are a lot of communities to choose from.

Builders are competitive right now.  With the average price per square foot for a resale home hovering around $164 the market is getting back to where it makes sense to build.  There are many communities where you can buy a lot and build your own home for less than the average price per square foot of a resale. 

Building your home lets you get what you really want.  Not something you settle for that happens to be on the market or a foreclosure that has been stripped and you have to put in all new appliances, tile, and carpets.

Here are a few things you should consider if you’re thinking about building a new home?

Choose a community that has homes of the style and size you want.  It is always better to build a smaller house in a neighborhood of bigger houses.   That will help protect your resale value.

Choose a neighborhood that has specific home construction guidelines Be sure that the rest of the homes built in your neighborhood will be similar to yours.

Choose a local experienced builder.  You want someone that has built here before and who is going to be there for you if you have warranty issues or if you want to add on or change things later. An experienced local builder knows where all the best lots are and can buy it for you or help you buy it.

Larry Koman has been a licensed Contractor and Home Builder since 1980. He specializes in building homes, restoring houses, and light commercial construction. He has built homes throughout California including San Jose and Santa Rosa and is now located in Bakersfield, California, where he has lived for 16 years. Larry is active in the Boys and Girls Clubs of Kern County and serves on the Redevelopment Agency Board of Directors for the City of Bakersfield. He writes for national online publications including Dr.Laura.com and Disasters911.com. For more information on Larry and his views, visit www.komanhomes.com.

Permission to reprint is granted only if Biography, Content, and Links are left intact.  ©2010

1. What kind of person are you? In order to decide to buy or build, you need to understand what kind of person you are. Are you a stay at home person that likes nothing better than working around the house or are you a go everywhere, seldom at home, no time for yard work kind of person. This will make a difference in deciding to buy or build a home. Buying an existing home typically means buying a home in an established neighborhood, with established landscaping and neighborhoods that are “broken in”. Mature landscaping requires more care; more mowing weeding, pruning. Or maybe you prefer condominiums where the landscape is included. Then you need to consider any conflicts the home owners association might be embroiled in and what restrictions they might place on you and your home. Building a home typically means new neighborhoods, contemporary homes with all the latest features and immature landscaping.

2. Buying existing homes. First there are the dream homes…you know the ones; with the big lots, large houses, and picture perfect landscaped front yards. Every town has them and everyone has at one time or another dreamed of living there. Well, be careful what you wish for. Many times, those beautiful homes come with steep price tags, and those beautifully manicured lawns take hours of maintenance every weekend or at least a very expensive gardener to maintain. Most of the homes are older; maybe they will need new windows, doors, roofs, insulation and sometimes, and they may need a lot more than that. Maybe they will need to have updated kitchens installed soon. Is that something you are really willing to take on?

But what about the newer homes, you say? The ones in that nice tract with the trees and the stone fronts where all the up and coming families live; what about those? Neighborhoods that are 10 to 15 years old are usually well established. The landscaping has matured, the trees are starting to shade the house and the neighborhood looks good, and the schools are established. Things you’ll need to consider are what kind of maintenance will the home need? Will it need to have the appliances updated soon? Will there be significant remodeling needed?

3. Building a new home. Typically, you can build a new home for less per square foot than you can buy an existing home. You might be able to get a larger newer home for the same or less money than an existing home. The new home will have all the latest appliances and often you can choose the tile, the carpets, the paint and more. Sounds great doesn’t it?

There are some drawbacks though that you need to consider. Many new homes never seem to be as nice as the model you looked at. That’s because in order to make the homes attractive to buyers, builders have decorated the homes to enhance the features. When your home is ready, it may seem plain and empty. You’ll need to invest in window coverings and home decorations to make your new house a home which can be expensive. Maybe your existing decorations will complement the new home or maybe not. Maybe the new house has rooms you never considered before and you’ll have nothing for them so you’ll need to buy furniture and accessories. Another consideration is that it can take time to build a new home. If you do need to move quickly this may or may not be the best option for you.

So consider these guidelines when making your decision regarding your move…

Build if:

• You want a home the way you want it and aren’t willing to compromise
• You like that new home feel
• You don’t want to have to worry about a lot of maintenance
• You want to pick and choose the things that go into your home
• You are confident and excited about the new schools that will come with the new housing developments

Buy existing if:

• You don’t mind some extra yard work.
• You want to live in an established neighborhood
• You like the established school districts
• You don’t mind extra home maintenance and enjoy the challenges of remodeling

The next step is to talk to a local realtor and to a local home builder. If you are relocating, talk to your relocation coordinator to get referrals to homebuilders and realtors in your new area. The key to a successful move is to research carefully all of the aspects that you need to consider, creating the life you want for you and for your family.

Filing a Claim
You should contact your insurance agent or the insurance company that insurers your home immediately and make sure they know you had a loss and are making a claim. If you don’t have a copy of your insurance policy, ask the insurance company for a copy. It is a good idea to read your policy to understand what is covered and what is not. Making a claim starts a legal time clock to keep everyone moving toward resolving your claim and getting you back into your home. Your insurance company has a duty to handle your claim timely

Pay Your Bills
It is important to remember that you still have to pay your mortgage payments along with your other bills even though your home may be gone or uninhabitable. This is a hard one for some people to understand because now you have to make a house payment for a house that you can’t live in while staying at a motel, rental home or with friends or family. You still need to make your house payments. Some lenders may allow a grace period for the first month after the disaster but don’t count on it. You want to make your payments on time if you can unless the lender has told you otherwise.

Your Extra Expenses
Things such as motel expenses, laundry, some food expenses, etc are things that might be reimbursed by your insurance policy. These are additional expenses above what you would normally spend to live. It is important to keep accurate records and get receipts. You may have to pay many expenses out of your own pocket which will be reimbursed by your insurance company. Some companies offer an advance on your Extra Living Expense coverage. You should ask your insurer.

Clean Up
It is going to be your responsibility to clean up the mess and rebuild your home. The insurance company is not going to do it for you. They may offer assistance and/or give you names of quality companies but in the end, you are responsible for clean up and rebuilding. The first major task is going to be cleaning up the initial mess. You are going to have to go through the debris to see what you can salvage. Then you will need to have a company clean up the remaining debris. The expense of that should be reimbursed or paid directly by your insurer. This is going to be an emotional task for you so take your time. Work methodically and steady and you will get through it. Ask for help if you need it. Your insurance company may offer some resources for you.

Taking Stock of Your Losses
The next task is going to be to provide a list of what you have lost to your insurance company. This is the time to assess just how much you have lost. You should methodically go through each room and catalog what you had and what you lost. Some insurance companies will give you forms to complete and others will accept lists you generate on your own. It is important not to rush this process. Sometimes we forget what we have. Take your time. Go through old photographs if you have them, talk to all family members and be thorough. The process may take you days or weeks depending on what you had and how much you lost. That’s okay, take your time and don’t let anyone rush you.

Rebuilding the House
You will likely be inundated with offers from contractors to rebuild your home. Most are reputable but some are not. Again, the key is to take your time. It is important that the contractor be experienced in fire restoration specifically, and they should have knowledge on how to work with your insurance company. REMEMBER: DON’T GIVE ANYONE MONEY NOW. Anyone working with you for clean up or other things right now should be willing to work with you to bill you or your insurance company.

Selecting a Contractor
Selecting a contractor is an important step. This will be a marriage of sorts for a few months. Get a couple of bids. Get to know the contractor and the representatives that work for them. Rebuilding can be a pleasant experience or a horrendous one depending on how much time you put into selecting the right contractor.

Check out contractors. Just because a contractor is from out of state does not mean that they are a bad contractor or are “fly by night”. Some reputable companies specialize in disaster reconstruction all over the US and do good work and have good reputations. There are however unscrupulous contractors out there so you should beware. In California, the Contractors State License Board, CSLB, requires all contractors to be licensed and maintains a website where you can check the status of a contractor’s license.

You want to be sure that the contractor has Liability Insurance and Workers Compensation Insurance for California. If someone gets hurt while working on your house and there is no workers compensation in force, you could be held liable for that workman’s injury. It is better to require a Certificate of Insurance for Workers Compensation from your contractor.

Out of Pocket Expenses
You may have some out of pocket expenses associated with replacing all your belongings and rebuilding your house that are not covered by insurance. Besides your deductible, you should be aware that the insurance company may not pay 100% of your loss. Many catastrophes in the 1980’s, 90’s and 2000s have forced insurance companies to rewrite their policies. Most don’t offer full guaranteed replacement cost policies and will pay you based on the Actual Cash Value Method (ACV) which takes into account how much the item cost originally, less any applicable depreciation. In some cases the insurance company may only pay 50% to 80% of the value. When you rebuild your house, you may want to upgrade certain things that may not be covered by your insurance company and you will have to pay that yourself. If you need help coming up with that extra money, you could look to home equity lines of credit, refinancing your home, or other debt. Also there are some sources of low interest rate loans and grants available through FEMA. Some of the expenses you pay to rebuild your home may be tax deductible. Seek the advice of a qualified tax advisor before claiming any tax deductions.

Paying the Contractor
It is important to know where ALL the money is going to come from before starting construction. Do not give your contractor a big lump sum payment in advance. A reputable contractor should be willing to start work with a payment due after something substantial has been done. For example, once the foundation has been cleared and lumber is delivered a partial payment would be warranted. Breaking the payout into 4 or 5 payments is a good approach. This allows the contractor to work without being financially strained paying for supplies and labor and protects you. You should hold a little money when the work is done to make sure that the last little punch-list items are completed. This should be comparable to the value of items to be resolved. These are good things to discuss with your contractor before you begin work.

Warranty
You should expect your contractor to provide you with a home warranty. Builders are required to provide a 1 year warranty and some provide longer. The warranty is for materials and workmanship but there are longer warranties associated with the components of the home such as the appliances and heaters or air conditioners.

Resolving Disputes
In resolving disputes with your insurance company, the State of California has a proactive Department of Insurance (DOI) www.insurance.ca.gov. They maintain an active complaint investigation department and will take insurance company complaints.

To resolve disputes with Contractors, the Contractors State License Board (CSLB) www.cslb.ca.gov maintains license control and investigates complaints against contractors.