* Competition from experienced real estate investors. Competition from experienced real estate investors. If there are good deals to be had, you can bet real estate investors will be lined up in front of you. If there are good deals to be had, you can bet real estate investors will be lined up in front of you.* Risks of undisclosed repair needs, tax liens, or other issues with the property. Risks of undisclosed repair needs, tax liens, or other issues with the property. Remember, these homeowners were probably financially stressed for a while. They may have held back on maintenance, gotten behind on their taxes, or used the house as collateral for other debts. Remember, these homeowners were probably financially stressed for a while. They may have held back on maintenance, gotten behind on their taxes, or used the house as collateral for other debts.

Still interested in pursuing foreclosed properties? Find an agent who specializes in them-most don't handle them at all, while some go so far as to arrange bus tours of local foreclosures A good source is www.reonetwork com. If you still have a regular real estate agent, explain to both what you're doing, so that you can agree on each agent's limited role. You'd also be wise to hire a real estate attorney to help navigate this somewhat touchy area. com. If you still have a regular real estate agent, explain to both what you're doing, so that you can agree on each agent's limited role. You'd also be wise to hire a real estate attorney to help navigate this somewhat touchy area.

Buying a House in Preforeclosure

When a house is in preforeclosure, the owners have received a notice of default from their lender, saying they have a set period of time (depending on their state's law) to either sell the house, pay all late mortgage payments and fees, or work out some other agreement.

Preforeclosure listings are publicly available even if the homeowner hasn't listed the property for sale. Online services like Foreclosures.com or or RealtyTrac.com compile this information from public records and members pay a modest monthly fee ($40-$50) to get the information. Some aggressive homebuyers or investors use this information to find homes in preforeclosure and then approach the defaulting homeowners to make an offer. Of course, they'll be interested only in properties that are worth more than the homeowners owe, because they'll be able to offer less than market value but still help the homeowners get out from under the mortgage. (If the seller owes more than the property is worth and can't make up the difference or negotiate an agreement with the lender, the only alternative short of foreclosure is a short sale, discussed above.) compile this information from public records and members pay a modest monthly fee ($40-$50) to get the information. Some aggressive homebuyers or investors use this information to find homes in preforeclosure and then approach the defaulting homeowners to make an offer. Of course, they'll be interested only in properties that are worth more than the homeowners owe, because they'll be able to offer less than market value but still help the homeowners get out from under the mortgage. (If the seller owes more than the property is worth and can't make up the difference or negotiate an agreement with the lender, the only alternative short of foreclosure is a short sale, discussed above.)

EXAMPLE: Lucas wants to buy his first home, and is looking for a bargain. He uses an online service and finds a house in the neighborhood he wants to live in that is in preforeclosure. The owners, Jean and Greg, owed $155,000 on the house and Lucas thinks it's worth about $180,000. Lucas approaches Jean and Greg and offers them $160,000: more than they owe on it, but less than it's worth. Lucas wants to buy his first home, and is looking for a bargain. He uses an online service and finds a house in the neighborhood he wants to live in that is in preforeclosure. The owners, Jean and Greg, owed $155,000 on the house and Lucas thinks it's worth about $180,000. Lucas approaches Jean and Greg and offers them $160,000: more than they owe on it, but less than it's worth.

Whether a homeowner will appreciate this, if you attempt it, is questionable. Some may feel like you're circling like a predator, waiting for misfortune to befall them. Others might be grateful that you're helping them get out of a tough predicament. Either way, it's a gamble, and the less experienced you are at it, the more likely you are to make mistakes.

If you do find a homeowner ready to sell, you can negotiate just as you would any other transaction. But you'll probably be very pressed for time. Depending on the state you're in, the homeowner could have as little as 30 days from the time the Notice of Default is filed to catch up on the mortgage (meaning you'll have to close the deal by then), or the lender will put the house up for auction.

Buying a House at Public Sale or Auction

If the seller doesn't pay what's owed and the lender forecloses, the property will be sold at a public sale or auction. This is rarely a good time for a first time homebuyer to get a good deal, for several reasons.

First of all, the lender will probably make the first bid on the house, for the amount owed on the mortgage. Unless the amount owed is low in relation to the home's value (rarely the case), you won't want to bid any higher. And if the price is right and you want to bid, you'll be competing with savvy real estate investors who know what they're doing. Even if you're the highest bidder, you have another giant hurdle to overcome: You'll be expected to have come with cash in hand, without a traditional loan or financing, which is rarely a realistic option for first-time buyers.

Add to this the fact that you'll know very little about the house itself. You may never have even seen the place, and you'll have to take it "as is," without the benefit of an inspection. It isn't uncommon for disgruntled homeowners to trash their former homes or to strip them of all valuable assets when foreclosure happens (light fixtures, appliances, even copper wires). Even worse, you may have to go without title insurance, leaving you open to the risk of an unpaid lien or a later claim to title.

Unlike a preforeclosure, when you buy a foreclosure, you aren't working directly with the homeowner anymore. But that doesn't mean the homeowner isn't involved. If a stubborn homeowner or tenant hasn't moved out, you will likely have to proceed with an eviction action or exchange "cash for keys"-that is, give them some money to vacate the place, to avoid the hassle and expense of the eviction.

Buying a Bank-Owned House

If no one else buys the property at the foreclosure sale, the bank will then own it and likely try to sell it, usually by listing it with a local real estate agent. You may come across these deals if you browse MLS listings. At this point, the bank may be willing to sell the house for less than the seller owed, because it isn't in the business of owning property, and wants to get as much of its cash out of the place as possible. Still, lenders want to get as close to market value as possible, and that may mean it's not such a great deal for you.

Even if the price is a little lower than you'd find on a house that isn't bank owned, a bank-owned property comes with additional complications. By the time the bank gets to selling it, it may have been vacant for months, which means it probably won't be in the best shape. Banks usually do little more than pick up debris and do a basic clean up, so you won't see any expert staging here, and you may find that the lower price is balanced by the hard work you'll have to put in to make the house liveable.

Buy a bank-owned home. Anjanelle and Alan were looking to buy a house in the Sacramento, California, area. "When a wave of bank-owned properties flooded the market at rock bottom prices, we thought it might finally be affordable," says Anjanelle. "But it was an uphill battle, and it took several months." They bid on three houses before striking a deal, offering a little above the asking price to avoid being outbid. But then the house didn't appraise for the amount of their offered price. "We thought the deal was going to fall apart, but the bank was so anxious to get rid of the place, and we already had a deal on the table, so they dropped the price. It worked out great for us, and then we had enough cash to do some of the major repair work the house needed, like painting the smoke-damaged walls and having the worn-out hardwood refinished." Anjanelle and Alan were looking to buy a house in the Sacramento, California, area. "When a wave of bank-owned properties flooded the market at rock bottom prices, we thought it might finally be affordable," says Anjanelle. "But it was an uphill battle, and it took several months." They bid on three houses before striking a deal, offering a little above the asking price to avoid being outbid. But then the house didn't appraise for the amount of their offered price. "We thought the deal was going to fall apart, but the bank was so anxious to get rid of the place, and we already had a deal on the table, so they dropped the price. It worked out great for us, and then we had enough cash to do some of the major repair work the house needed, like painting the smoke-damaged walls and having the worn-out hardwood refinished."

Also, banks usually sell properties "as is." At this stage, you'll at least have the benefit of an inspection contingency (discussed in more detail in Chapter 11). That means that while you can't expect the bank to do anything about repairs that are needed, you'll at least be able to have the property professionally inspected and back out of the deal if you don't like what you see.

If you do find a good deal on a bank-owned home, chances are you're not the only one. It isn't unheard of for well-priced bank-owned properties to garner as many as ten to 20 offers. (Your real estate agent should be able to find out this type of detail on properties you're interested in, with a little legwork.) To make your offer stand out, you may have to pay more than other bidders. You'll definitely want to be preapproved for a loan, and it could help if you preapproval letter comes from the selling lender-they'll trust their own assessment of your finances better than anyone else's.

Houses Sold at Tax Sales When a homeowner fails to pay property taxes, the state may take title to the property, then sell its claim (its "lien") at auction. The buyer of the lien will have to allow the current owner a legally specified amount of time to pay off the lien and reclaim the property before stepping in to claim title. The procedural requirements are complex and definitely not recommended for first-time buyers. For related articles, go to www.lienexchange.com.

CHECK IT OUT.

For information on foreclosures, see the following sites. Most offer free house listings for one week, then require a paid subscription: Most offer free house listings for one week, then require a paid subscription:* www.propertyshark.com (includes 50-state law summaries) (includes 50-state law summaries)* www.realtytrac.com (includes 50-state law summaries) (includes 50-state law summaries)* www.homesales.gov (for listings of houses foreclosed upon by the federal Department of Housing and Urban Development after owners failed to pay their FHA loans) (for listings of houses foreclosed upon by the federal Department of Housing and Urban Development after owners failed to pay their FHA loans)* www.foreclosure.com, and* www.foreclosures.com (note the "s" after "foreclosure"). (note the "s" after "foreclosure").

Buying in Probate

Usually if a homeowner dies, and either left a will or didn't leave any instructions at all, the property must be "probated." A court reviews the case, orders a division of assets, and more. Without getting too deep into the legal details, some properties end up being sold, usually at a court-supervised public sale or auction. This is the classic "probate sale." Another variation on this theme is that the estate's executor, administrator, or personal representative may sell the house privately, with or without a broker, so that cash can be distributed to the heirs.

It's possible to get a bargain on a house in probate whether it's sold at auction or through negotiation. If it's sold at auction, a minimum bid is set based on its appraised value, and you may be the only bidder. Even if you're not, California real estate agent Annemarie Kurpinsky points out that, "Unlike competing for nonprobate properties, you know exactly how high the other bidders are willing to go, and you therefore have no feeling of having overpaid." And with a negotiated purchase, you may benefit from the heirs' desire for a quick sale-they may regard any money that they get as a windfall.

But the disadvantages of buying a probate property include: * Legal and procedural hassles. Legal and procedural hassles. Court procedures vary by state but almost always involve paperwork and deadlines-and often a trip to court to bid on the house. Court procedures vary by state but almost always involve paperwork and deadlines-and often a trip to court to bid on the house.* Risks of undisclosed repair needs. Risks of undisclosed repair needs. You're waiting for a property whose physical condition may be going from bad to worse. And many states lift their disclosure rules for houses in probate. Worse yet, in many probate sales you must buy the property "as is," without making the sale conditional on the results of inspections. You're waiting for a property whose physical condition may be going from bad to worse. And many states lift their disclosure rules for houses in probate. Worse yet, in many probate sales you must buy the property "as is," without making the sale conditional on the results of inspections.

If you're interested in probate houses, find an agent who specializes in them. Or, if you happen to know about a person who has died, there's nothing wrong with checking the probate court records to find out who's administering the estate and contacting that person. Attorney Fred Steingold explains, "The executor (or "administrator" or "personal representative") is probably an amateur-a relative of the deceased-and may be grateful for a way to liquidate the real estate without the expense of a commission or the hassles of an auction."

Housebuying Fantasies For when reality hasn't yet delivered the house of your dreams, here are some fantasies to indulge in:* Buy an island. Buy an island. Whether you'd fancy an Irish island with a castle or a coral reef atoll in Belize, they're listed, with photos, at Whether you'd fancy an Irish island with a castle or a coral reef atoll in Belize, they're listed, with photos, at www.vladi-private-islands.de.* Buy an airplane. Buy an airplane. A California woman paid $100,000 for a 747; disassembled it; and turned it into a curvy, eco-friendly cottage. (The plane's nose was used as a meditation temple.) See A California woman paid $100,000 for a 747; disassembled it; and turned it into a curvy, eco-friendly cottage. (The plane's nose was used as a meditation temple.) See http://news.bbc.co.uk/2/hi/americas/4926216.stm.* Build a treehouse. Build a treehouse. You can buy plans-including for a treehouse that's 64 square feet and requires two trees to support it-at You can buy plans-including for a treehouse that's 64 square feet and requires two trees to support it-at www.thetreehouseguide.com.* Live on a houseboat. Live on a houseboat. You provide the boat, and lease the dock or slip. But first, visit Amsterdam's House Boat Museum: You provide the boat, and lease the dock or slip. But first, visit Amsterdam's House Boat Museum: www.houseboatmuseum.nl.

Okay, now get back to reality.

What's Next?

Your home search may continue for a while, but that's all right. Don't settle for anything less than a home that meets your minimum requirements (even if those had to be adjusted), one where you'll be happy living for long enough to strategize your next move. Once you find the right house, things will move quickly-and your first step will be to make an offer to the seller, as described next.

CHAPTER 10.

Show Them the Money: From Offer to Purchase Agreement

Meet Your Adviser Richard Leshnower, a New York-based attorney with specialized experience in real estate.

What he doesHelps buyers and sellers negotiate and close on the purchase of co-ops and houses in New York City and surrounding areas. Richard not only represents people at the front end of property sales, but helps some who come to him with postsale problems-for example, a buyer who didnt understand what she was signing and discovered that shed bought a house without buying its side yard.

First houseI bought it in 1974, a beautiful colonial in Woodmere, New York. I asked my boss (another attorney) to represent me at the closing. Closings in 1974 involved a lot fewer documents than youll encounter today! But what I remember most about the closing was the behavior of the husband seller, who was retiring and moving out of state. He flipped out under the pressure of the moment. He stood up, grabbed the table and threw it over. Papers went flying all over the floor. His wife jumped on him to calm him down. The good news is that he returned to his gentlemanly self, and the deal closed-and I lived in that house for 30 years.

Fantasy houseA majestic house with an ocean view, like you might find in Big Sur, California. In addition to the usual rooms, Id like a small hideaway room where I can read, view television, and use the computer. And lets pack the house full of other good stuff like a game room, swimming pools (outdoor and indoor), bowling alley, gym, movie theatre, and a slip for a boat. Not that I really need all of this-my wife Karyn and I are empty nesters and already have a house we love in Delray Beach, Florida, and a co-op apartment in Hewlett, New York.

Likes best about his workHelping people who are otherwise intelligent and cautious find their way out of a tough situation-for example, afford a home when they thought they couldnt qualify for a mortgage. And nothing thrills me more than when I get a call out of the blue from a client whos moved elsewhere, to tell me how he or she is doing.

Top tip for first-time homebuyersPick good advisers who you know are on your side and will be available to you for consultation. Dont let anyone tell you that something is too difficult for you to understand-you dont have to read every word of every document, but ask your advisers to educate you on their meaning. Also, walk the property and look at every nook and cranny yourself. That avoids situations like one where some buyers (whom I didnt represent) bought a big house on a large area of land one summer but didnt walk beyond the thick shrubbery in the backyard. After moving in, they heard trains rumbling-and sure enough, there was a train track right behind the rear property line, which came into full view that autumn, when the leaves fell off the trees.

You've found it, the place you love, the home you want. Now all you have to do is tell the seller you'll take it, sign a few papers, and move in, right?

Not quite. First, you'll need to decide on the terms of your offer; most important, whether you'll pay the asking price. And maybe you'll want to ask the seller for a short closing period so you can move in soon or request that the custom-built kitchen table be left with the house. You'll figure out whether you and the seller can agree on such terms once you start negotiating. In this chapter, we'll explain how to: * submit an offer, negotiate with the seller, and reach an agreement* decipher the typical language in a standard home purchase contract* decide on the contract's basic terms like price, contingencies to protect your interests, and deposit* make your offer the best it can be, given the market you're in, and* work with a developer to buy a new home.

Start to Finish: Negotiating and Forming a Contract

Buying a house is nothing like most of the financial transactions we make-unlike groceries, clothing, or most consumer goods, the price and other terms are largely negotiable. To understand the options and get the best deal, it's good to know how the process works before you begin.

Submitting an Offer

Once you say, "This is the house!" your real estate agent will probably suggest you sit down together to draft an offer. (In a few states, however, your attorney will do the drafting, or the opening offer may be verbal.) You'd normally go back to your agent or attorney's office, but if there's time pressure, perhaps from competing buyers, drafting an offer in the agent's car is not unheard of.

Are You Ready?

Use this checklist to decide whether you're ready to make an offer on a specific house, or whether you should do more legwork first:[image] This house is in my price range, and I have my down payment cash available. This house is in my price range, and I have my down payment cash available.[image] I'm preapproved for a mortgage, and I know what kind of mortgage I want. I'm preapproved for a mortgage, and I know what kind of mortgage I want.[image] I've hired or am already working with a real estate agent, mortgage broker or lender, and/or attorney. I've hired or am already working with a real estate agent, mortgage broker or lender, and/or attorney.[image] I'm ready to devote much of my time over the next several weeks to closing the deal and preparing to move (unless it's a yet-to-be constructed house, in which case the time period may be longer). I'm ready to devote much of my time over the next several weeks to closing the deal and preparing to move (unless it's a yet-to-be constructed house, in which case the time period may be longer).

In many states, a buyer's initial offer eventually serves as the complete contract, after both the buyer and seller have approved and signed it. Such offers are written in great detail, including not only a proposed price, but what conditions (contingencies) must be met for the deal to finalize, how disputes would be resolved, and who will pay what fees. It may be accompanied by a sum of money called an earnest money or good faith deposit. In other states, the offer is a very short document or is not written down at all-the point is just to communicate to the seller that you'd like to buy the house. The full contract is written later, sometimes with the seller's attorney creating the first draft.

TIP.

Ask your agent to explain the standard contract ahead of time. Says Illinois Realtor Mark Nash, "When working with first-time buyers, I show them the standard form, and all required disclosures, before we even start looking at properties. I answer questions they have about what each clause and phrase means, and I encourage them to read it over and make sure they really understand it. That way, when it comes time to actually write up the contract, they're less overwhelmed-they're dealing with the specific terms they want in the agreement, not the basic meaning of the contract language itself." Says Illinois Realtor Mark Nash, "When working with first-time buyers, I show them the standard form, and all required disclosures, before we even start looking at properties. I answer questions they have about what each clause and phrase means, and I encourage them to read it over and make sure they really understand it. That way, when it comes time to actually write up the contract, they're less overwhelmed-they're dealing with the specific terms they want in the agreement, not the basic meaning of the contract language itself."

Presenting Your Offer

Once you have an offer together, someone (usually your agent) must present it to the seller. A great agent can present your offer in the best possible light. Perhaps your offer isn't as high as the seller would like, but you're preapproved for a mortgage and are including few contingencies that could slow the process. Whatever your strengths, it's your agent's job to highlight them.

Normally, your agent will contact the seller's agent and arrange for a time to meet and present the offer. The seller may come to this meeting, too. The seller may hear just one offer (yours) or may hear multiple offers from several potential buyers, sometimes on the same day.

Occasionally, a seller will request that offers be sent by fax, maybe because the seller is out of town or expects multiple offers. In that case, include a personal cover letter outlining your qualifications and the strengths of your offer.

The Seller Responds

After you've submitted your offer, you'll probably be on pins and needles, wondering how the seller will react. The seller is eventually going to do one of three things: (1) accept, (2) reject, or (3) make a counteroffer.

CAUTION.