Investing In Foreclosed Property

I just spent the last two weeks searching and arranging details for my first home purchase. It was a time consuming process but I learned a lot and hope to share some of that learning with you. I haven’t closed on the property yet and will post information as we proceed but I wanted to write about some of the initial stages while it is still fresh.

Because this was my first purchase I proceeded very cautiously and I recommend that approach for every new home buyer. It can be a complicated process and mistakes in the early stages could create pressure in the latter stages. You can get into trouble if you aren’t sufficiently prepared or knowledgeable. The large number of foreclosures on the market is evidence of that. I have been planning for this transaction for a few years and the planning involved several key issues three of which I will address here.

Debt Ratio
Debt ratio is the amount of your gross monthly income that goes toward the payment of debt, represented as a percentage, and this number is a key factor influencing the decision of a mortgage company to accept your application for a loan. If it’s too high you won’t be accepted. If it is high but within acceptable limits your application may be accepted but will have a high interest rate.

Even if you make payments on time and you credit score is relatively good, a poor debt ratio can kill a good deal. Before you buy, make sure this ratio is well within the acceptable range. The better it is, the more likely you are to qualify for the best interest rates.

It’s easy to calculate.  Add up your payments for:

  • Mortgage or rent including taxes and insurance if a mortgage
  • Credit card
  • Car
  • Personal loans
  • And alimony

Divide the total by your gross monthly income. Anything up to 41% is considered acceptable, though less is better. Above that means you are a risk.

My credit has been good for a very long time but my debt ratio was too high a few years back. I was told to get my debt down and reapply which is what I did. I used some of my savings to pay down the debt and after that, every mortgage company I talked to gladly issued a pre-approval letter.

Web Sites
Once you’re in the right financial place you then must find the right house to buy and whether you buy to reside, rent or resell you can do a lot of searching and researching on the net.

In fact, house shopping is one area of business that has been transformed by the internet. You can search an entire city for listings without ever leaving your office.  It doesn’t remove the necessity of physically visiting the houses you eventually buy but you can do a lot preliminary research before you visit the first house.

What used to take hours, days and weeks of travel time, not too mention fuel for your car, can now be done in much less time with your laptop. You can cover a much larger area, get more detailed information and make a lot of decisions before you talk to the first agent or visit the first house.  But finding the right sites is not necessarily easy.

Real estate folks have learned how to make money off the listings and there are several sites that require payment of a monthly fee to get detailed information about houses. Most of the ones I looked at offered a free 7 day trial but only if you provided your credit card details.

Besides the trouble of remembering to cancel your subscription after 7 days it would be silly to lock in with any one site.  No site has all the listings and there are some that are free. A serious hunt will produce all the information you need without paying a cent. The idea is to buy a house not pay for listings.

Following are sites I found useful and none of them required payments:

  • With Google maps you can find the layout of a neighborhood, get directions to any home and locate amenities in any area.
  • HomePath lists all the Fannie Mae foreclosures.
  • Zillow listed every house of every kind.

Most of these sites include the selling price, previous sales history, property taxes, pictures, listing agent, year it was built, type of construction (brick, wood frame, condo, apartment, etc.), area schools, how long it has been listed, if under contract, whether the listed price has been lowered and if so how many times. Very useful information.

The HomePath site also includes neighborhood statistics: crime rates, weather patterns, educational level of residents, number of homes rented vs owned or vacant, etc..

Remember this, however, HUD foreclosures have been inspected prior to listing and the inspection reports can be accessed on their site. Fannie Mae houses must be inspected after a contract is signed and the inspection may be paid for by seller or buyer depending on the details negotiated in the contract.

Having HUD reports up front sounds like a good deal but with Fannie Mae you can renegotiate a contract following the inspection report or back out completely if the original contract allows for this.

Of all the sites, Zillow was the worst about keeping their information up to date but once you find a house elsewhere, Zillow is a good place to cross reference the listing. One thing they provided that I found useful was a “birds eye view” of the neighborhood for any listing that also showed which houses in the neighborhood sold recently and for how much.

Another very useful site is:

  • REIClub, a forum for real estate investing. It is free to join and they provide many free resources for home buyers as well as a platform to ask all your important questions. Many of the contributors are experienced investors who freely share their knowledge.

A Good Agent
As a new buyer I wanted a good agent on my team. They know the pitfalls and the agent you develop a good relationship with will watch your back. A good piece of advice at the right time is priceless. If the agent knows you are committed to them they will speak up when you need them to. Even when I get more experience I will still use agents who can be trusted.

Besides, the only person who really benefits from working without an agent is the one who pays the commission, the seller. I negotiate better with a go between anyway. In fact, the more distance there is between buyer and seller the less personal the deal is.

Let’s be honest. A house buying situation is first of all business. There are better ways to socialize or make friends. The only real friend you have in the process is the agent who represents your best interest.

But, there is one warning. Be very careful about using the agent who listed the property. Not every agent has the character and integrity to represent the best interest of both buyer and seller simultaneously.

The real question for me is how to find the right agent?

Here again the internet is very useful. Every site includes contact information for the agent who listed a particular property. When I found a property I thought was interesting I called the agent of record and asked them questions.

I’m more curious than a four year asking “why” so I needed someone who could patiently feed me answers.

I called many agents and asked lots of questions. I was new at this, so had little knowledge but that didn’t mean I had to be stupid and I wasn’t afraid to ask. If an agent was patient with me and their answers checked out – I always verified answers – they were short-listed. If they had no time for a newbie or didn’t have answers they were crossed off the list. The short-listed agents were called again and asked more questions.

I asked personal questions also, like how long they had been in the business and what qualifications they had.  I also wanted to know if they could submit bids for both Fannie Mae and HUD foreclosures. The agents who had good answers, readily responded. The agents who were looking for quick bucks reacted defensively. It wasn’t hard to identify the best choices.

Another agent to avoid is the one who acts like they have so much business they must screen the clients. No one is that busy or if they are they should take their contact details off the net. Being pretentiously business-like is condescending and patronizing neither of which impresses a serious minded person.

I eventually found an agent (broker) who knows the business well, fielded all my questions very patiently and once I told her she was the agent of choice she didn’t hesitate to advise me on several occasions. Together we successfully contracted a deal on a Fannie Mae foreclosure at a great price for me!

Investing in real estate is a complex process and the more you know up front the better you can craft a good deal.  The issues discussed here represent only a few considerations and I have only touched on these briefly.

If you feel under qualified, not too worry. Now is the time to buy and due diligence will keep you safe during the process. I’m new at this but have learned a lot  and making good progress. Do your homework before you buy and, please, before you leave, using your own experience, tell us what you know.

And remember, always THINK!AboutIt.


  1. says

    Thanks TL, I appreciate the input. This has been a huge learning curve for me and I have enjoyed the process. Still niggling over details for my first buy but I am comfortable with it so far.

    In fact, I backed out after the inspection. There were repair issues I wasn’t sure about. I did some further research and I am now in the process of renegotiating the deal.

    Wasn’t sure how Zillow did their estimates but I have used and compared their figures with information found on other sites. For me, Zillow is one of the more easily manipulated sites.

    Now that I know you work close to this line of business I may ask a question or two occasionally.

  2. says

    A few quick thoughts, because this is getting very near what I do professionally.

    1. The agent is on your side. Up until the offer and counter-offer price gets to be within about $10,000 of one another. At that point, the agent’s real client is the deal, since the agent is likely getting 3% of the total transaction, and the agent would rather close a deal quickly than haggle and possibly lose a deal over something that only makes $300 in difference. The way to handle this is to understand beforehand what realistic price you are willing to pay, and what price is too much, and stick to it.

    2. Zillow does its price estimations based on a complex statistical progression of comparable sales in the area, including foreclosures completed with bank credit bids. This depresses the actual market value, and particularly in a downward-trending market, Zillow will tend to exaggerate the downward swing and give you a depressed value. Similarly, in an upward-trending market, Zillow tends to give unreliably high estimates. Finally, Zillow determines comps based on straight-line distance from the subject house and the square footage and room count. It does not and cannot look at premiums, upgrades, or on-the-ground factors like desirability of particular neighborhoods. In my neck of the woods, it is entirely possible that my house is in a desirable area that adds value, and a quarter mile away is a very undesirable area that depresses value, despite having similar square footage and room count numbers. Also, Zillow does not take lot size or zoning issues into consideration.

    What it all really means is, you have to do your homework. You also need enough capital to sit on the new property while you’re waiting for the market to turn around. Check IRC 1023, too — you might find it is to your advantage to flip or exchange the property within five years after acquiring title.

    Good luck, and go get rich!
    .-= Transplanted Lawyer´s last blog ..Antonin Scalia, Judicial Policymaker =-.

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