First time buyer. Are foreclosed homes cheaper?

January 14, 2012 8:01 AM

Are foreclosed homes cheaper? And how would you go about buying your very first home?

Hi there,

I'm just looking for a modest 1-2 bedroom house as I'm tired of renting. This is my first time entertaining the idea so I have no idea where to begin & what type of things to consider. Any ideas on how to get the most for my money? I have about 15,000-20,000 to use as a down payment and would ideally like to live in California.

Many thanks for any ideas, suggestions or resources (e.g. blogs, books, articles, podcasts, etc).

Best,
Danah

posted by Danah_78 to home & garden (11 answers total)

I'm not a Realtor(c) but my father was, and one thing he told me was to never buy a studio or one-bedroom, as they're much harder to re-sell than a two-or-more-bedrooms place.
posted by easily confused at 8:25 AM on January 14, 2012 [1 favorite]

Foreclosed homes are not necessarily cheaper. They are usually bank-owned, meaning that the bank has put the house on the market to recoup their losses. They usually hire a third party real estate management company to handle their deals. They usually sell for around market value, but it's possible to make a better deal.

On the other hand there are short sales. That's when a bank is trying to settle its losses with an owner that can't afford his mortgage, and they agree to sell the house at a lower price than the mortgage is worth in order to cut their losses. The problem is that it's harder to obtain conventional financing for the home because it's not a traditional sale. The process takes longer and has more pitfalls and uncertainty. It can be a good way to buy a house, but requires a savvy real estate agent.

Start by talking to a reputable bank or credit union for preapproval on a loan. Buying a home kind of starts with understanding how much you can afford, then looking for houses in that range in the neighborhoods you like. Ask about FHA loans as a first time buyer.

Websites like Redfin and Zillow are very helpful for informational purposes.
posted by jabberjaw at 8:29 AM on January 14, 2012

Have you thought about consulting with a trusted real estate agent? We bought our first house in the last year and a half, and our agent was great at helping us navigate the complications of the system, taking into account what we could pay and exactly what we were looking for. It was a pretty good experience, even in a declining market. The thing that made it good for us is that we found a good agent through someone that we knew that had a similar experience with that person.
posted by SpacemanStix at 8:30 AM on January 14, 2012

Do your research. Figure out what the convergence between 'ideal mortgage payment' 'what the bank says they'll approve me for' and 'what's on the market and figure out what's the best solution for you. When I started my house hunt, I wanted to have my mortgage payment match my rent payment. Harr.

I didn't like anything that would have been my price range. I ended up buying a place that's perfect for me, but doubled my payment. So there.
I had an excellent agent, and I'd also suggest The Missing Manual if you're just getting started.
posted by msamye at 9:55 AM on January 14, 2012

Talk to a realtor. If you have friends or colleagues who own places, ask who their realtors were. If you're serious though you should talk to at least two to get a feel for different people. My husband and I talked to one guy we met through Redfin and another guy we met through friends. Also Redfin offers free home buyer classes.
posted by kat518 at 10:50 AM on January 14, 2012

If you are willing to accept some title risk you might also want to look into sheriff's sales in your county.
posted by steinwald at 11:18 AM on January 14, 2012

You need to know more about the process before you can realistically assess your situation. I recommend either the book "Home Buying For Dummies" (your library will have a copy. I know the title is dumb but the book is very clear and helpful, very much worth reading.) and/or read through the website How to buy your first house. These will walk you through all the steps of figuring out what price houses you should be looking at, what you can afford, and all the unfamiliar terms and the "who does what" procedural aspects.

Foreclosed and short sale houses may in some cases be cheaper but they also come with extra hassles and risks. They are not automatically a great deal.

When you figure how much money you have for a down payment, hold some back for the necessary repairs, etc that you WILL have to do in the first couple of years of owning a home.Also you will need to pay what are called "closing costs", so be sure to figure those into your budget. (See the website linked above for more details.) Don't plan to spend all your savings on the down payment.

Very roughly your first step is to decide if it's a good idea to buy. One consideration: are you pretty sure you'll be staying in the same area for at least 5 years? If you are likely to move, probably it's better not to buy. Buying and selling houses eats up a bunch of money (from realtor fees, government fees, and other transaction costs), so even if you could sell for a bit more than you paid, you could still lose money.

Your next step is to figure how much you can spend on the down payment - see the above site for how to figure that out. Suppose for the sake of argument that you can make a $15,000 down payment. If this is going to be a 20% down payment, then you can buy a house worth $75,000. If it was going to be a 5% down payment, which is possible with certain types of mortgages, then you could buy a house worth $300,000.

Your next step is to figure out where in that range ($75,000-$300,000) you want to be. Use the mortgage calculators to see what kind of monthly payment each price level would mean for you. You probably want to get a monthly payment lower than your current rent, because you'll have additional costs (maintenance, taxes) that are not included in the mortgage payment.

Once you settle on a price range, you can start looking at real estate websites for the area you're looking in. They will let you plug in the target price of house that you want to look at, as well as other restrictions like number of bedrooms, bathrooms, etc. Suppose your price is $250,000. What does that get you? In what geographic area, in what school district, etc. Once you look over the listings for a while you'll get a sense of what the going price is for which kind of house. Are you seeing anything that would be a suitable house? At this stage you'll need to decide if you want to pursue buying a house now, or decide to buy in a different location, or what other compromises to make. (Be suspicious of houses that seem way, way nicer than the average house in your range -- often they have a hidden problem, so you'll need to do a lot of detective work before committing to buy such a house.)
posted by LobsterMitten at 11:37 AM on January 14, 2012 [1 favorite]

Foreclosed houses are really only cheaper if you buy them at auction on the courthouse steps. You need all cash to do that, you can't get a loan to do it.

Be warned that most lenders these days require a 20% downpayment. So $20k is probably not enough in California, unless you are buying a really cheap house in a really crappy area. Remember that you will also have several thousand dollars in closing costs, in addition to your downpayment.
posted by mikeand1 at 11:47 AM on January 14, 2012

Something I learned while helping my daughter buy a house: You may not be able to get a mortgage on a townhouse or condo if more than 15% of the association's homeowners are delinquent in paying their assessments. We also learned to stay away from short sales and bank-owned (REO) homes if you want to close the deal in this lifetime.
posted by Joleta at 9:01 PM on January 14, 2012

My husband and I bought a foreclosure.

We found the bank that owned it wasn't terribly interested in negotiating. They didn't seem to have same urgency to sell that a single owner may have.

That said, we loved the house and felt the final price was fair.

After we purchased it and moved in, we found some .... Oddities. Light fixtures in some rooms seemed like cast offs (for example, there was the light kit for a ceiling fan as the fixture in one of the bathrooms). One picture we'd seen of the home had a gorgeous wood stove - that was gone and replaced by one that was much less attractive (I named it "The Troll").

Mind you, everything was like this when we first looked at the place - but it had so many features we loved that we didn't notice the anomalies.

All that to say - if you are planning on buying a home, look closely at the details. If that home is a foreclosure, be aware that people sometimes do odd things to property they are losing.
posted by hilaryjade at 6:08 PM on January 15, 2012

oooh, good point hilaryjade: while some foreclosed homes are structurally fine & ready to move right into, some are most definately NOT! If you do buy a foreclosure, make very, very sure your pre-purchase home inspection is VERY thorough --- some people have been known to do the obvious, removing appliances/trashing the place/etc., but you've also got to watch out for vandalism in properties that have been empty for a while, where someone might've come in and stripped out wiring or pipes or plumbing fixtures.
posted by easily confused at 12:56 PM on January 18, 2012