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Buying Foreclosure Property: Purchase Loan or Refinance?

There are several ways to buy distressed properties–prior to foreclosure, on the courthouse steps, or from the bank that owns them (these are called REO properties, or Real Estate Owned by the bank). Contrary to what many believe, buying at auction isn’t usually the cheapest way to purchase foreclosures. At this point, the lender has not gone through the process of valuing the property and preparing it fore sale–so the reserve price is often equal to what is owed.

And today’s foreclosure properties are often so over-financed that they aren’t worth what is owed. So by assuming that an auction is automatically a good deal , you could end up paying more for a home than it’s worth. Not to mention the disadvantage of having to pay cash, deal with possible title issues, and the fact that many sales don’t allow the inspection of the property. And that’s why many many foreclosure sales go on and no one even shows up to bid.

Homes unsold at auction go on the lenders’ books as assets–and they need to be disposed of. So once you’ve found your property, how do you finance it? It depends on your intent for the property.

* Hard money Some investors use business lines of credit, private “hard money” financing, cash,  or even high-limit credit cards to close on property quickly, rehabilitate it, and sell at a profit. The interest rate is less of an issue beccause the time frame is short.

* Cash-out refinance Others purchase the property with one of those “fast money” sources, then refinance through their favorite lenders. The advantage of this is that they can close quickly, then  transition to cheaper financing for a longer term. The disadvantage is that lenders consider this kind of refinancing “cash out” rather than “rate and term,” which is replacing one mortgage with another. So they will lend less of the home’s value and charge more to do it.

* Seller financing A third option is to get the lender who owns the home to finance it. In fact, many large institutions require that you prequalify with them regardless of where you get your loan. You may be able to negotiate better terms with a lender that is also a seller.

* Traditional Finally, you may arrange your financing just as you would for any other purchase. This gives you the opportunity to shop for your best mortgage. Keep in mind, however, that a loan agent unfamiliar with financing distressed properties can cost you a lot more in the long run than a fraction of a percent in interest rates. For example, many banks’ purchase agreements include a per diem, a charge the buyer has to pay for closing later than agreed. These charges can be hundreds of dollars per day, and those are calendar days, not business days.

So your choice in financing depends on your intent for the property as well as your financial position and the resources available to you. An experienced real estate agent and lender can make sure you get a nice deal on both your property and your financing.

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One Response to “Buying Foreclosure Property: Purchase Loan or Refinance?”

  1. Buying Foreclosure Property: Purchase Loan or Refinance? | Mortgage Refinance Blog Says:

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