If you’re in the market for a great investment on the Outer Banks, foreclosures would seem like a very viable option. Since they are in fact making up about 40% of our sales each month they are clearly big business! Here are a few things you will need to know before venturing into a foreclosure purchase.
1. You MUST be pre-approved. That’s right, you have to talk to a lender and get a pre-approval lender before you start your search. Considering the current financial climate, banks won’t even start communication with a potential buyer without knowing they have the financial capacity and resources to actually make the purchase. Even if paying with cash a verification of funds is needed. Either the verification or pre-approval letter from an established lender will be required to submit with your offer.
2. Be prepared to pay within 4% of the listing price. Now that banks, and agents for that matter, have acclimated to the market their listing prices have become more accurate. Stats on the Outer Banks show that foreclosure properties are selling within 4% of the asking price. The better the deal it is, the more offers it generates, the higher the selling price goes, sometimes even OVER asking price. The key is not to focus on getting a “deal” by working the asking price down, rather understand the price you’re paying today is every bit of 35% to 40% lower than the peak price. Which means it’s highly likely the price will be there again sometime in the future. That’s like instant equity!
3. Act quickly. There is a lot of competition among buyers for the best foreclosure deals. If you see something you like, be ready to go. That’s why you need to visit the lender for pre-approval before you start your search. These homes are not lasting long on the market.
4. Have funds ready to go for an Earnest Money Deposit. This is your chance to show the bank how committed you are to the purchase. If there are multiple buyers looking at the same property, there won’t be any time to transfer funds and send the check later. It needs to be ready at the time you make the offer.
5. Understand buying a foreclosure means you’re buying in “as-is” condition. Under the new North Carolina Offer to Purchase you’ll have a period of due diligence to perform various inspections to determine the condition of the property and any repairs it may need. However, generally speaking there will be no concession or monies paid by the bank to make those repairs. You will take title knowing what needs to be fixed and footing the bill for it.
6. Don’t pay a Due Diligence Fee. The new North Carolina Offer to Purchase provides every buyer a due diligence period to perform all inspections and arrange all financing. If at any time during this period for any reason or no reason you decide not to purchase the home, you simply notify the seller and your Earnest Money Deposit is returned. The right to this period generally requires a fee that is non-refundable. The banks won’t require it to be paid and with the volatility of working with the bank rather than a regular seller, it is recommended not to pay the fee.
7. Be sure to get Title Insurance. Most foreclosure homes will transfer title with a Special Warranty Deed rather than a General Warranty Deed. The Special Warranty Deed is limited on its warranties in only protecting against defects or encumbrances since the grantor (bank) acquired title. If the home was improperly foreclosed on, this insurance will protect your interests. The cost is the same regardless of the type of Deed used to transfer title. In North Carolina costs are $2 per $1,000 of coverage. Your lender will require title insurance on their portion of the purchase price so you will likely have two policies, one for your portion and one for theirs.
8. You will need to furnish the home for vacation rentals. Sadly the banks don’t realize the value of the furniture as they just aren’t used to handling vacation rental properties. So the home will be completely unfurnished, sometimes appliances too. Be prepared to include this expense in your Budget.
9. You won’t have any rentals booked. Most of these homes have been vacant for a while, up to 2 years. So they won’t be in contract with a Property Management firm and you won’t have any rentals to inherit. If your plan is to rent the beach home you purchase, you will be starting from zero. No repeat renters, no real history to rely on and depending on the time of year you purchase limited advertising. Plan to be able to support the house with no income for the first year. After that you should be fine.
10. Check the status of the property with the Homeowner’s Association. There’s a good chance the fees haven’t been paid recently or even for a few years. Be very clear with the bank who is going to take on that expense, otherwise once it’s closed it’s all YOU!
11. Use an experienced Agent. Banks have only one motivation in selling these foreclosed homes – MONEY. Their goal is to get the most out of it at any cost. By hiring an Agent to solely represent your interests and NOT the bank gets you a much more objective representative. A good Agent will be focused on your goals and not the banks’. Not to mention the amount of knowledge you need to have to be able to successfully close a deal in today’s volatile market. As TV shows often post “Don’t try this at home.”
