Sue Fox, @Properties. Direct 773.816.1788

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How to Buy a Chicago Foreclosure (as Supply Steadily Shrinks)

filed under: Buyers, First-time buyers, Foreclosures posted on January 25th, 2015

A FETCHING FORECLOSURE:

A FETCHING FORECLOSURE: This vintage 3-bedroom house in the Bowmanville section of Lincoln Square was a foreclosure that needed work. But it still sold in just two weeks to a cash buyer for $360,000 — more than $45,000 above the asking price.

Interested in snapping up a foreclosed home, a tarnished gem that you can make gleam with a little elbow grease? So, unfortunately, are a lot of others –  including many large institutional investors who buy Chicago-area homes by the hundreds, often outbidding regular home buyers with cash.

Over the past three years, large companies like Blackstone Group and American Homes 4 Rent have bought roughly 10,000 distressed properties in the Chicago area and converted them into rentals, a buy-and-hold strategy that has helped drive up the prices of such homes by about 30%, according to a recent analysis by Realty Trac. But with houses that once sold for an average of about $161,000 now going for $210,000, it’s gotten much harder to find a good deal.

Meanwhile, there are fewer foreclosed homes to choose from. Chicago still has one of the highest foreclosure rates in the country, but total foreclosure activity has declined about 25% over the last year. It’s down almost 80% from 2009 levels, when the city’s real estate recession was in full swing.

So what’s a determined buyer to do? In 2014, I helped my buyers purchase more than 20 foreclosed homes, and there is definitely a method to the madness. Here are a few tips to make the process easier:

1) Be Ready to Pounce: The market for foreclosed homes in Chicago is very competitive. Many of them will attract multiple offers and sell within days, so it’s vital that you are prepared to act quickly. This means having a pre-approval letter from your lender or proof of funds from your bank, showing you have the financing in place to complete the purchase. It means visiting the home as soon as it hits the market to assess its condition. And, in most cases, it means making a strong offer. Unless the property has been sitting on the market for months, chances are other buyers will be interested. So do your homework, have your realtor run the comps and prepare a solid offer that can stand up against the competition (which often includes cash offers from investors.)

2) Hire a Great Inspector: Foreclosures are usually left vacant – sometimes for months – and by definition their last owners were in financial trouble. So these homes are often in poor condition, with battered floors and missing appliances. Mold and water damage are common. In general, houses and 2-flats are in worse shape than many foreclosed condos, which can be relatively new depending upon the building. When buying a foreclosure, it’s important to know exactly what you are getting into in terms of repairs and maintenance. A top-notch home inspector will provide what is likely to be a long list of all the home’s problems, along with guidance about which repairs are critical and which can probably wait a few years.

3) Amass Your Cash: Many foreclosed properties need work. And with Chicago’s 100-year-old housing stock, they often need A LOT of work, sometimes more than $100,000 worth of it. These rehab jobs are not for the faint of heart (which is why so much of the flipping business is now dominated by institutional investors.) If you don’t have the cash of your own, you’ll need some type of construction loan, and they are not always easy to obtain. Fannie Mae recently ended its HomePath mortgage program, which provided loans to rehab rundown foreclosures owned by Fannie. But there are still options like FHA’s 203K renovation loan (designed for owner-occupants) and Fannie’s HomeStyle renovation loan (which can also be used by investors who plan to rent out the home.)

One last tip: If you do intend to live in the home, keep an eye out for foreclosures owned by Fannie Mae or Freddie Mac. Both offer First Look programs that are designed to give regular home buyers an edge over investors when a home hits the market, by allowing owner-occupants a period of 15-20 days to make an offer – before offers from investors will be considered. This may be the single best way for an ordinary buyer to turn a boarded-up foreclosure back into a home.

Written by Sue Fox //

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