Tips & Tools : Inspection

Property Auctions: Be Ready Before the Bidding Begins

RE.com Tips & Tools — Sun, 02 Aug 2009 15:30:00 GMT

EDITOR'S NOTE: With foreclosure properties still dominating the housing landscape in the U.S., we've asked our friends at RealtyTrac® to guest author some articles to shed light on the foreclosure crisis. RealtyTrac is the most trusted source of foreclosure information in the country. We hope that the information provided here and in other articles will be beneficial to understanding, avoiding and even leveraging (as an opportunistic buyer) home foreclosures.

By Rick Sharga, RealtyTrac Vice President of Marketing

Buying a property at a public foreclosure auction is not for the faint at heart. It usually requires patience, persistence and a fair amount of cash, since most state foreclosure laws stipulate that the winning bidder pay all or part of the winning bid on the spot.

But for those willing to do the work and able to front the cash, auction properties can yield bargains of 20-40 percent below the market value, and sometimes even more. Like any high-yielding investment, foreclosure auctions come with a certain amount of risk. Managing that risk successfully depends on first doing thorough research on the properties you plan to bid on—perhaps the single-most important step in a successful and profitable auction purchase.

“You’ve got to know the property inside and out and you’ve got to know that the party who is auctioning the property is, in fact, in the first lien position,” said T.J. Marrs, a real estate investment trainer and author based in Vancouver, Wash. Since many properties may have multiple liens (first and second mortgages or tax liens, for example), this is a critical piece of information to have before the auction begins. Marrs added that if the party auctioning the property is not in the first lien position, the winning bidder may have to pay off other outstanding loans against the property.

It helps that researching properties has become much easier with advances in information technology. In the past, home buyers and real estate investors sifted through piles of documents at the local courthouse to properly research properties. But thanks to online services like RealtyTrac, you can accomplish extensive property research from home or anywhere else you happen to be, as long as you have an Internet connection. That doesn’t mean you will feel comfortable interpreting all the data available from this research. First-time auction buyers or investors may be wise to rely on a local real estate agent or real estate attorney to ensure they’re making good decisions about which properties to bid on and how much to bid. Contact an Agent using RealtyTrac’s nationwide network of prescreened real estate professionals.

Whether working with a real estate professional or not, you can follow this property research checklist to make sure you’re fully prepared when you attend an auction.

Research state laws and observe a local auction
Each state governs how the foreclosure process – and specifically the auction procedure – works in that state. The process can vary widely from state to state, so aspiring buyers or investors should study the foreclosure process in their state. Important factors to consider are how quickly a property can go to auction after the owner defaults, how much cash is required at the auction and if the owner has any redemption period after the auction.

In some states a property can be sold at auction less than a month after the owner defaults, while in other states the foreclosure process can stretch out more than a year, not including any redemption period. The length of the foreclosure timeline certainly influences how quickly you need to research a property and secure the necessary cash to bid at the auction. If there’s a redemption period, the former owner can typically buy back the property by paying the full amount of the winning bid (plus any applicable fees and penalties) during the redemption period. If you’re the winning bidder, you should wait until the end of the redemption period before sinking any additional capital into a property purchased at the auction. RealtyTrac’s state foreclosure summaries provide specifics about how the foreclosure process works in each state.

First-time auction buyers should attend a local foreclosure auction to observe how state foreclosure laws play out in the real world. RealtyTrac provides a daily updated list of properties nationwide that are scheduled for public foreclosure auction. Auctions are often postponed or canceled, so it’s a good idea to call the trustee or attorney listed on the day of the auction to confirm.

Secure financing
Before bidding at an auction, you’ll need to evaluate the cash you have available to spend on an auction purchase. In addition to considering liquid assets such as bank accounts, stocks and bonds, you can apply for a home equity loan to cash out the equity in your home or other real estate assets. Once you calculate the cash you have available, you can determine how much of that cash you feel comfortable using to purchase an auction property. Of that amount, you will need to set aside some for estimated repairs and some to pay off outstanding liens that survive the auction purchase (although if you purchase the auction property below market value, you may be able to take out a home equity loan on the newly purchased property to fund repairs.) The remainder of the cash can be used for bidding at the auction.

Some states require as little as 5 percent of the purchase price in cash at the auction. Others require the entire purchase price in cash. Either way, you will need to present the necessary cash at the time and place of the auction, usually in the form of a cashier’s check. That means you should be ready to withdraw your cash quickly when an auction opportunity arises. If the winning bid is below the amount of the cashier’s check presented at the auction, the trustee at the auction should reimburse the winning bidder for the difference, although reimbursement may take several days or longer. Many bidders bring several cashier’s checks in incremental amounts so they avoid having to wait for a substantial reimbursement.

Analyze market value
Once you’re comfortable with how the foreclosure process works in your state and your spending limit, you can dive in and start pursuing specific auction properties. For any property scheduled for auction, the first step is to compare the property’s estimated market value to the opening bid. The opening bid is the total amount owed to the foreclosing lender and is the minimum amount the property will sell for at auction. This amount is included on the public auction notice and on each auction property listed on RealtyTrac. In addition, RealtyTrac arms subscribers with each property’s estimated market value and a list of up to 15 recent comparable sales. If the opening bid is higher than the estimated market value, that particular property does not present a bargain-buying opportunity. But because of the hot real estate market in most areas, the opening bid is usually far below the estimated market value, making for the possibility of a profitable purchase. A quick market value analysis is just the beginning, however. You need to dig deeper to find a property’s true investment potential.

Check lien & loan history
Before bidding a dime at the auction, it’s important that you carefully research a property’s title for any liens and loans that won’t be cleared out by the auction sale. All liens and loans affecting a property’s title are available at the local recorder’s office or online through RealtyTrac. Unlike typical real estate purchases, auction sales don’t always transfer ownership of the property with a clear title; therefore, it’s possible for a buyer to purchase a property at an auction and still have to fork over additional funds to clear out other outstanding debts secured by the property. You might be willing to do this, but you need to know about any outstanding debts before the auction so you can set your maximum bid appropriately.

To determine which liens and loans will be cleared out by an auction sale, you should look at the priority of the liens and loans taken out by the current owner. Priority is typically determined by the date when the lien or loan was recorded. The first recorded takes highest priority and the most recently recorded takes the lowest priority. The defaulted loan that triggered the auction sale typically clears out any “junior liens” that have a lower priority. There are a few exceptions such as property tax liens, which take priority over all other liens and are not cleared out by an auction sale. Any “senior liens” that have a higher priority than the defaulted loan will usually continue to encumber the property after the auction.

Property title research is probably the most complex and technical part of the auction-buying process, and it’s impossible to overemphasize its importance to a profitable auction purchase. First-time auction bidders should seriously consider enlisting the help of a local real estate agent, attorney or Title Company for this part of the research.

Estimate needed repairs
Estimated repairs should be factored into any property purchase, but there’s an added twist with auction properties: in most states, auction bidders don’t have any opportunity to view the inside of the property before they bid, let alone hire a professional inspector inspect the property. You may be able to approach the current occupants and ask permission to view the inside, but that permission is not guaranteed.

While this makes it difficult to pinpoint exact repair costs, you can obtain a ballpark estimate just by viewing the property from the outside. You will be able to infer a lot about the property’s overall condition by observing the condition outside. Serious buyers will park their cars and walk by the property and around the neighborhood, also looking for neighbors as potential sources of information. You can also check natural hazard reports to see if the house is located in a zone that makes it more prone to flood, fire or earthquake damage. Still, the exact cost of repairs is unknown, and you should leave some extra margin for profit in your maximum bid in case repair costs escalate above your estimate.

Calculate your maximum bid
The maximum bid is simply the amount a buyer is willing or able to pay at a public auction. It’s important that you set a maximum bid before the auction to make sure you don’t get caught up in the emotion of a bidding war and end up overbidding. Marrs, the real estate investment trainer and author, recommends setting a maximum bid of 60-70 percent of the property’s market value as a general rule of thumb. This amount may vary based on the local real estate market conditions. From this baseline bid amount, you should subtract estimated repair costs and any outstanding liens and loans that aren’t cleared out by the foreclosure sale.

At the auction, stick to your maximum bid and don’t be influenced by other bidders. Sometimes the foreclosing lender or junior lien holders will bid at the auction to make sure all of their debts and costs are covered by the winning bid. This can sometimes inflate the winning bid close to market value, eliminating any chance at a great bargain. Of course, the bidding will go up incrementally, so you shouldn’t immediately jump to your maximum bid. Continue to go up incrementally until you reach your maximum bid or are declared the winning bidder.

You should consider foreclosure auctions, whether you’re looking for a great bargain on a home for yourself or entering the real estate investment arena. Auctions aren’t for all buyers, but with the proper resources and the right research they can be a prime opportunity to purchase property below market value.

Why Home Inspections Are Important

RE.com Tips & Tools — Fri, 03 Aug 2007 17:36:00 GMT

Get a home inspection when buying a home to avoid buying a lemon.

After much searching, you finally find your dream home. It’s perfect…or is it? What if problems lurking beneath the surface transform your dream home into a nightmare? A home inspection tips you off to any potential problems with the house, enabling you to either make a more educated offer or avoid the purchase of a money pit.

What exactly does a home inspection involve?
With a home inspection, a certified home inspector evaluates the home. He (or she) meticulously walks through the house, checking out its physical condition, structure, the construction, and mechanical systems. He or she looks to identify any problems with the home. With a home inspection, you also find out the age and condition of your things like your home’s heating system, central air conditioning system, plumbing, and electrical system, as well as structural components. You don’t want to sweat out the first heat wave because you bought a house with a broken down air conditioning system. A home inspection can let you know if any of those systems are on their last legs.

Do I really need to pay for a home inspection?
Home inspections are not cheap. A typical inspection (depending on your geographic area) can cost upwards of a few hundred dollars. Money can be tight when purchasing a home and you may ask why you should spend even more on an inspection when you have already fallen in love with the home? There is nothing that can end a love affair quite like finding out that you bought a lemon. And that’s where the home inspection helps. The inspector has no emotional attachment to the house, so he has no problem pointing out its faults. Home inspectors are paid to be objective. In addition, home inspectors are trained to understand home construction, maintenance, and safety.

But, what about your real estate agent? Surely you can save money by letting your agent point out potential problems. Well, real estate agents are trained to help you buy a home, but they are not experts in the structure and systems of a home. Your agent may be able to suggest cosmetic fixes, but no agent would want to be liable for evaluating the state of a home’s plumbing or the lifespan of the roof.

When should you order a home inspection?
Once you have a signed purchase agreement or purchase contract on a house, you should line up an inspection. But before you sign a purchase offer be sure that it contains an inspection contingency. This will allow you flexibility to renegotiate the terms of the deal if the inspection turns up a lot of problems. Such contingencies generally state the inspection must take place within a certain time frame. Make sure you are aware of these time limits when setting up your home inspection.

On the day of inspection, the inspector spends a few hours carefully going through the house and then, usually within no more than 72 hours, provides you with an inspection report. Based on this report, you can request that the seller make all or some of the repairs; renegotiate the sales price based on the cost of repairs; or, if there are major problems with the property, you may be able to void the contract (depending on the terms of your contingency).

Red Flags When Buying a Home

RE.com Tips & Tools — Thu, 26 Jul 2007 20:01:00 GMT

Watch out for these signs that something might be amiss with the house you're interested in.

It’s exciting to shop for a new home, and even more exciting to find one you love. But don’t let that blind you to the little signs of potential problems that could haunt you long after the excitement of moving into a new home has worn off.

So what kinds of situations should send up red flags when you’re house hunting? Some are more obvious than others.

“The first thing we look at is the overall condition. If the house is just a total wreck when people are showing it, it’s probably not been cared for overall. There may be a lot of deferred maintenance,” said Curt Johnson, a REALTOR® with Century 21 Award in San Diego, Calif., a member of the RealEstate.com broker network.

Johnson said cracks on both sides of a wall, such as on either side of a door, can indicate a cracked slab or shifting foundation. So can doors or windows that do not open or close properly. It’s worth further investigation, he said. And that’s not all.

“Any time there is a musty smell, or just a sense of moisture in the property, it is a huge red flag,” he said. “We’re always concerned about mold issues.”

Also look for signs of water damage in the ceiling, which can indicate a roof leak.

Sometimes the red flags aren’t in the house itself but in the neighborhood.

A lot of For Sale signs can be a red flag that the neighborhood is in decline and property values are falling, said Sandy Guralnik, a REALTOR® in Charlotte, N.C., with Coldwell Banker United, a member of the RealEstate.com broker network.

Other neighborhood red flags include a lot of investment properties, or rentals, which might not be maintained as well as owner-occupied homes, she said. Additionally, a lot of foreclosures are likely to bring down property values and can signal a neighborhood in distress.

Other red flags experts say to watch out for when buying a home:

Signs of termite infestation. Be sure to have the home inspected for termites before buying.
Moisture in the basement. Correcting seepage problems can be expensive and time-consuming.
Signs that the home is settling beyond what would be expected for its age. Horizontal cracks can be an indicator of serious foundation or structural problems.
Roof gutters rusting or pulling away from the structure. Water leaks can damage the home, and gutters pulling away from the home can be a sign of wood rot in the fascia.
Land sloping toward the home. This is a recipe for water damage.

One of your best defenses is to have the home inspected before closing. Qualified home inspectors are trained to spot structural and system problems the average person wouldn’t notice. The inspector also can advise you on whether those problems raise serious red flags or are typical for the age and location of the house.

An inspection also can tell you how long the heating and air conditioning is expected to last, or whether you’re likely to need a new roof in a couple of years. If you proceed with the purchase, you’ll know to budget for those repairs.

Top 10 Home Buying Mistakes

RE.com Tips & Tools — Wed, 11 Jul 2007 18:37:00 GMT

Use our list of common house-buying mistakes to avoid costly regrets.

1. Doing it alone. Buying a house is a complex transaction. Even if you don’t use an agent, you’ll need a complete, dependable team: lender, lawyer, inspector, insurer, as well as referrals and advice from friends and family. Enlist the help of these individuals early in the buying process.

2. Buying at first sight. You may be in love with the place, but does it fit your family’s needs and budget? Make a list of your needs and wants and make sure the house fits your requirements. Check out the neighborhood and the community before you buy by visiting at different times of the day and week to learn about noise and traffic patterns. Even if you don’t have kids, check out the local schools to make sure your resale value will be good.

3. Not getting pre-qualified and pre-approved. Being pre-qualified gives you a general idea of how much you can afford to borrow. Being pre-approved means a lender has verified your information and credit rating and agreed to provide you with a specific amount of money. You are in a better position to go house hunting knowing exactly how much you can afford and that you have financing.

4. Overbuying. You may qualify to borrow more, but can you afford to? Analyze your monthly costs: debt, food, transportation, entertainment, and savings. As a general rule, your total monthly debts, including your mortgage, should not exceed 36 percent of your income before taxes. Be sure to budget enough to cover closing costs (often two to five percent of the home’s purchase price), plus moving, redecorating and maintenance. Allow for increases in ongoing expenses such as utilities and taxes.

5. Misplacing your trust. No matter how much you like the agent, sellers, inspector, or the guy down the block who vouches for them, remember this is a business transaction. Your decision is binding. Do your own research and know your support team’s roles and responsibilities.

6. Relying on oral agreements. Get it right and get it in writing. Written agreements almost always trump oral ones when it comes to contracts. If the offer says the lawnmower is negotiable, but the agent says it’s included, get it in writing.

7. Skipping the fine print. You need to understand what you’re signing before you pick up a pen. Ask for documents in advance, make time to read them and ask questions. Get copies of your mortgage papers a few days ahead of closing.

8. Forgetting or betting on resale. Avoid buying a home that costs 50 percent more than neighboring homes and think before buying the most expensive home on the block. Your neighbors’ lower home values will weaken yours. Remember, markets change. If you buy intending to flip your investment and the market falls and you have to sell, your selling price may not be enough to even cover your mortgage.

9. Making an unconditional offer. Protect yourself with at least two of these contingencies in your offer:

Mortgage financing -- You’re pre-approved, but is the house? Before a bank will lend you money, it will want a formal appraisal of the property to confirm that there is sufficient equity in it to warrant the loan. If the house appraises lower than the sales price, the loan may be declined.
Inspection -- never buy an existing or new home without a thorough home inspection. Walk through the home with the inspector to learn more about the house and any concerns he or she may have.
Insurance -- confirm you can get adequate coverage. In some areas, it’s difficult to get hazard insurance.

10. Having buyer’s remorse. No place is perfect. There will always be surprises. Don’t let a few initial blips spoil the whole ride. And don’t miss a great house waiting for the perfect one!

Step 5: Closing on Your Home Sale

RE.com Tips & Tools — Mon, 15 Jan 2007 18:14:00 GMT

Getting to the closing table can take time.

Prior to most home closings, there are contingencies that must be met and paperwork that has to be taken care of.

Contingencies

A contingency allows the buyer to back out of a contract if certain conditions are not met within a certain period of time. Some of the most common contingencies include the following:

Inspection – Almost all home contracts have a contingency requiring the home to satisfactorily pass inspections. The buyer pays an inspector to examine the home and find any potential problems. The buyer and seller then agree on what has to be fixed and when. This must be done prior to closing.

Financing – Usually, home sale contracts also have a contingency involving financing. The buyer must be able to get the mortgage specified in the contract. If this cannot happen, the contract is void.

Appraisal – Many buyers make a contingency that the home must appraise for at least the selling price. Since the financing is dependent on this, it is important. Either the buyer or your REALTOR® will arrange for the appraisal.

Once all the contingencies are met, the sale can go forward. Your REALTOR® will draw up all the closing documentation, including the settlement statement or HUD-1. This lists out all the costs of the sale to the buyer and the seller. Read over the settlement statement carefully to make sure everything in the contract is indeed reflected in the actual sale. If the document is correct, all that’s left is to sign the paperwork and hand over the keys to the new owner.

Checklist: Contract Terms and Clauses

RE.com Tips & Tools — Thu, 11 Jan 2007 21:33:00 GMT

We all know far to well that the idea of combing through a contract may be unappealing, there are numerous key points all of us should be familiar with and understand.

When a purchase contract is set before us, many of us may find our eyes glazing over. While the prospect of combing through a contract may be unappealing, there are key points everyone should be sure to understand. Here are some common terms and clauses in a purchase contract. Clarify with your REALTOR® if there is anything you don’t understand.

Name of buyer(s) and seller(s). It seems obvious, doesn’t it? If you are the buyer, make sure to fill in your name as you would like it to appear on the deed. If there is more than one buyer, list the names of all co-buyers.
Legal description of the property. Make sure the description is specific, particularly regarding city limits, school districts and rural properties, and includes any relevant zoning information, as well.
Down payment or deposit information. Often, a buyer will offer a deposit (usually $1,000 or one percent of the purchase price) with an offer. This amount should be held in escrow (by an attorney or a REALTOR®’s trust account) until all conditions of the contract have been met.
Purchase price. Both parties will negotiate the amount until an agreement is reached. The contract should list the final agreed-upon price, as well as the exact terms of sale.
Closing date. This is the date the deed will change hands. If you are the buyer, it is the date the home will officially become yours. If you are the seller, you will need to move out by this date.
Personal property included in the sale. This includes any appliances, furniture or other items included in the contract. Include a detailed description of all personal property items, including the make and model of any appliances.
Disclosure of defects and lead paint disclosure. Some states, such as California and Maine, require the seller to disclose any known defects about the property in writing. If the house was built before 1978, the seller is required to include a lead-based paint disclosure as part of the contract. If the property was built after 1978, this disclosure becomes optional.
Contingencies. If the sale is dependent on the buyer’s mortgage financing, the details of the financing should be included in the contract. The buyer can even list things such as expected interest rate and mortgage terms.
Inspections. An acceptable property inspection should be a condition of sale. If there are other, specialized inspections to be conducted (such as a termite inspection), they should be listed here as well. Include a clause that indicates who takes on the cost of repairing problems found during the inspection process -- the seller usually assumes the cost of major repairs.
Home warranties. If a home warranty has been purchased, information should be included in the contract.
Title insurance. Information about title insurance should be listed in the contract. There should also be a clause identifying how to handle potential problems that arise during the title search.
Commission information. The contract should stipulate who pays the agent’s commission and how much gets paid.
General contingency clauses. Some contracts include a general clause that allows the buyer a few days to review the agreement with an attorney or other professional.
Signature. This is the famous dotted line. Both the buyer and seller should sign only when they are comfortable with all terms in the contract.

Inspections and Certificates

RE.com Tips & Tools — Thu, 11 Jan 2007 18:41:00 GMT

When your inspection and certifications are complete, you will be armed with important information for a smooth closing.

Whole-house inspections

Inspections are designed to disclose defects in the property that could materially affect its safety, livability or resale value. They won’t disclose cosmetic problems, so you should cover those in your own basic inspection.

Depending on the type of financing you choose, several home inspections may be conducted. After you do a surface inspection, have a reputable professional conduct a whole-house inspection. Get a recommendation from your agent, a friend, relatives or neighbors.

Should you select a government loan (FHA or VA), there will be a further inspection at the appraisal stage, which amounts to a mini-inspection. Do not rely on this as your only inspection and do not let your agent, family or friends or, especially, the seller dissuade you from having another, thorough inspection done.

In fact, any offer to purchase should be contingent upon a whole-house inspection with a satisfactory report. There will be a time limit — typically seven to 10 days — for the inspection to take place. Fees can range from $200 to $500, but you won’t get stuck with major repairs that a good home inspector would have found.

Termite, well, sewer and septic certificates

These are certifications that the sewage and water supply work properly and that the property is free of termites and/or other wood-destroying insects.

Passing a Home Inspection

RE.com Tips & Tools — Thu, 11 Jan 2007 06:00:00 GMT

When you're selling your home, don't get lulled into complacency because your house shows wells; underneath it all you may have problems

Don’t wait for inspection day to review the condition of your home. Check for potentially deal-breaking flaws ahead of time.

When you’re selling your home, don’t get lulled into complacency because your house shows wells. Underneath it all you may have problems. A home inspection will check out these eight possible pitfalls; make sure to repair them before putting your home on the market.

1. Plumbing. A home inspector will look for corroded pipes by checking water pressure, and test appliances such as washing machines and dishwashers. You may want to consider installing new fixtures to draw attention away from the age of your plumbing.

2. Bad odors, dampness, mold and mildew. These can mean your basement has too much moisture and an inspector will want to know why. Have drainage problems damaged the foundation, rafters or floor joists? If the problem is simply poor ventilation, all you may need is a dehumidifier.

3. Structural concerns. A sagging roof, uneven floors or cracks in the walls or foundation are obvious problems. While some conditions may be expensive to rectify, it’s well worth repairing those that require only cosmetic repairs.

4. Roof damage. Clean your gutters and downspouts because the inspector will check them. He will also determine the condition of the shingles or roofing material, even if there is no sign of trouble, such as water stains. The flashing around the chimney and bricks and mortar will also be assessed for leaks. If you know you have trouble with the flashing, have it repaired. Usually, this is not a big expense compared to the cost of a new roof.

5. Leaky doors and windows. Replacing caulking or weather stripping is usually enough, so do it before any leaks cause damage that is more difficult to repair.

6. Environmental concerns. If you are worried your home might have any environmental contaminants, you might want to pay for your own home inspection before a buyer arranges for one. A specialized inspection may be required, for instance, if radon gas is suspected. Other things to look for include lead or other contaminants in the water, lead-based paint (common in houses built before 1978) and asbestos or formaldehyde insulation.

7. Heating and cooling systems. The heating and air-conditioning systems are usually fairly easy to access and inspect. Your furnace doesn’t have to be new, just in good working order.

8. Electrical system. Make sure all sockets work. The wiring, electrical panels and circuit breakers must meet current code standards. If you do not have 200-amp service, then an upgrade may be recommended.

If you have some concerns about the condition of your home, arranging your own pre-sale home inspection may be helpful. Correcting any flaws may speed up a sale and boost your price. Any reported defects you choose not to correct must be disclosed to prospective buyers. In most cases, buyer’s inspections call for only minor repairs. Be aware, however, that some buyers may make a counteroffer with a lengthy list of repairs to try to drive down the price of a house. If this happens, you may want to consider whether the deal is worth it.