Tips on Buying Your First Fixer-upper Home

Here are some hints and tips for singles or pre-family couples considering buying a fixer-upper a as a first house, with an emphasis on foreclosed real estate. Everything that applies to purchasing these homes will apply to a regular sale as well, it's just that the foreclosure market can supply you with more opportunities.

When to Buy

There are benefits to you when you buy in the pre-foreclosure phase and others when you purchase after the foreclosure. Each individual deal will have to be assessed for you to maximize your profit potential.

The other consideration about timing is the condition of the house. The seller of a pre-foreclosure property is in much the same position as any other seller and you will not have the stripping of the house or the damage often found in real estate that has already been foreclosed.

Pre-foreclosure sales

The lender on a property must file a notice of intent to foreclose which creates a grace period of usually three weeks. These grace periods vary so check the regulations that apply to the area in which you intend to purchase.

Once the home owner receives this notice they become the seller with the most motivation to negotiate a favorable deal for you, the buyer. At this point the seller still has a chance of avoiding the actual foreclosure and the long-term damage to the credit rating that inevitably follows.

You can buy directly from a lender that has gotten the deed signed back, buy from the owner at discount prices or a short-sale, where the lender forgives a certain amount of the loan, is an option.

Foreclosed sales

There are three methods of acquiring foreclosed properties, each with their pro's and con's, and a decreasing risk factor where the profit potential diminishes.

Foreclosure auctions - The opportunities for discounts of as much as 40% on the purchase of a foreclosed home by public auction helps to maintain the appeal of the auction sale in spite of the risks involved. There might be no clear title available, no opportunity to inspect the property and payment in full is due within 24 hours. You might even get the responsibility of evicting the former owner or tenant.

Repossessions - The banks, HUD and the VA offer other sources of foreclosed sales and even the VA homes are available for purchase by the general public. HUD has special benefits for the owner/occupier and must be purchased from a HUD certified broker.

REO's - Real estate owned properties are the least risk for the least profit. These are properties owned by lenders who want to sell, the property will have clear title and you will be able to inspect the property before bidding.

What to Look For

You can easily find foreclosure lists on-line, some free and some for a fee. Use the local resources whenever you can, newspapers, supermarket flyers, local realtors and lending institutions. The closer to home the deal is, the easier it will be for the buyer to perform due diligence and supervise any work not being done personally.

Any work not being done personally should be kept to a minimum to maintain the potential profits at a maximum. Balance your skills and budget against the carefully projected cost of repairs and furnishings.

Houses with attic or basement areas that can be transformed into living space or with large rooms that can be conveniently made into two rooms are definite positives.

Add up all the components that make up the price, such as the cost of the property and the down payment, closing costs and property taxes, recording fees plus title and escrow costs as well as insurance. Make sure the total is low enough to allow for repairs and some money for a profit in case you resell.

What to Look-Out For

A home owner that has been unable to afford to make mortgage payments has probably not been able to afford repairs or maintenance either. Some will even strip the house to sell the fixtures and appliances while others vandalize property as an emotional outlet.

If a home is left vacant it is subject to mold development, pest invasion and freezing pipes that can lead to water damage. All of these will lower the purchase price but will raise the repair costs so get a property inspection to give you the information needed to create accurate budget estimates.

Negotiating

The more information about a property that you have, the more negotiating opportunities you will open up. Take time to look up the public records at the town hall. Some of the items that are available and helpful to know:

What the seller originally paid for the property.
Are there any mortgages or liens outstanding.
The age of the house.
Construction and general condition.
Number of bed and bath rooms.
Is there a basement?

Add to this some knowledge of what the seller is looking to get from the sale, whether it be cash, damage control on their credit or even avoiding foreclosure altogether and you will find it helpful in closing the deal.

Not every real estate deal closes on the first offer made, counter-offers are common and useful negotiating tools. Price is not the only bargaining chip either. You can negotiate who pays closing costs, escrow, time-lines and any other factor that can become important to the sale.

Give yourself a big edge by arranging with your own lender to get a pre-approval letter. This is a powerful document that demonstrates to the seller that you have done the necessary preliminary work and can back up the offer made on the house. A deal made with you will not be delayed by the contingency of a loan approval.

Covering Your Debt

Speaking of your loan, did you know that you will likely pay about 1.5% more on a loan if your credit rating is in the low 600's rather than nearer 760? Before you go to get your loan be sure to fix any problems with your report rating.

Lenders will be looking at your income compared to your total debt. The monthly mortgage payment should be no more than 28% of your monthly income. The lenders will tend to want your total monthly debt payments to be about one third of all your monthly income.

After the Close

Now the paperwork is finished and you are about to embark upon one of life's little adventures, fixing up the fixer-upper. Take lots of photo's and video where you can, for the scrapbook and to share on-line.

One of the great resources available to the modern handyperson is the real time on-line home improvement blogs and chat sites that have knowledgeable people interested in what you are doing.