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Do’s and don’ts of buying a foreclosure

Christian Stevens has worked in the real estate business for more than 20 years. He’s an REO expert. REO means Real Estate Owned properties. These are foreclosed properties that have been repossessed by a bank or mortgage lender. REO agents work with the lender to clean up and sell the property.

“I was seeing various different flippers come by on a flip, criticizing what they would do differently so that they could make more money than this guy who was trying to flip the property and you were getting flippers buying from other flippers. And redoing brand-new homes with a slightly different personal taste and they were selling for more money… What happened in the American Dream of just buying a home to live in? We all kind of lost sight of that.” — Christian Stevens, on how the real estate market changed during the housing boom.

Stevens estimates that there are more than 550,000 homes in some stage of foreclosure in Southern California. About 112,000 of them are on the market and ready to be sold. Between 2008 and 2010, Stevens and his team at Keller Williams sold almost 500 REOs in the Los Angeles area. More are expected to become available as more homeowners go into default and lenders seize homes.

If you are tempted to buy a foreclosed property, Stevens has this advice:

    1. First and foremost: Forget anything you may have heard about buying at the courthouse steps. Those auctions are cash-only sales. That means no mortgage financing and taking the property “as is:” You get the home exactly the way the previous occupants left it. The occupants might even still be there. So good luck evicting them and remodeling after they trash the home. Also, the Trustee’s Sales, as the courthouse auctions are known, are for professionals only. Dozens of buyers get together there and know exactly what they are bidding on, have detailed information about the home and occupants, and are experts at paying occupants to leave. You will be bidding against people who do this for a living.

    2. Don’t waste time signing up to the many REO/foreclosure sites, such as Their listings are inevitably old, sold or cold. Even if you know a property is bank owned, you don’t know which real estate company is going to list the property for sale.

    3. Don’t bother calling the banks direct as you will be in endless switchboard limbo. If foreclosures are up tenfold over the last two years, how many lenders do you think have hired 10 times the staff? Correct, none.

    4. Huge portfolios of REOs are owned by Freddie Mac and Fannie Mae, the government sponsored housing agencies. They have excellent web portals — — showing each property with photos and featuring the listing agent.

    5. Pay strict attention to the hidden costs often passed on to the new owner — liens, special assessments and taxes. Read the preliminary title report closely. Ask a lot of questions and get detailed inspections to firmly grasp what you are buying. No one remodels a house or replaces the roof and plumbing just before they lose the property, so be prepared to find deferred maintenance pretty much everywhere.

    6. Don’t be afraid to renegotiate the price with the bank after inspections. You may be forced to do so anyway as your mortgage lender will require an appraisal, and the appraiser will likely call out any items that need attention. Once the appraisal and physical inspection have been done get contractor bids. Forward them and the appraisal along with the inspection (via your realtor) to the bank. Your lender may require severe defect to be repaired prior to funding your loan.

    7. To find the best sources of foreclosure listings, search your area for agents who specialize in REOs and visit their websites. Banks also have their own websites, for example, but the sites are huge and REO listings are tough to find.

    8. Once you find an REO expert, let him or her represent you as your agent. In a multiple offer situation, you will have the inside track. Even though all offers are presented and all parties treated equally, very often you will be treated more equally than the others.

    The bottom line is to wait until the property becomes an REO, or bank-owned, and is past the auction process. But whether you want to buy a house out of foreclosure, through a short-sale or just a regular sale, St. Louis real estate broker Matt Kastner says the most important thing to do is have your financing already lined up.

    “The loan process right now is definitely more time consuming than it was before. So if you don’t have your homework done already, you’re probably not going to get that property,” said Kastner.

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