Is a Foreclosure Purchase Right for You?

Buying a foreclosed property is often plugged as a way to get a terrific deal on a property although the foreclosure industry is tightening up with today’s relatively strong job market. There are two ways to purchase a foreclosure property – at auction, or, if sale is unsuccessful at auction, after a bank has taken ownership. These types of homes are also known as REO, or real-estate owned homes.

In either condition, consult a local attorney for a legal understanding of this type of purchase. A comprehensive title search and report is recommended to learn whether or not additional liens exist on the property. While there is money to be made, it is important to fully understand what you are getting into.

When purchasing a home at auction, you are competing against professional investors – a cash purchase necessary to be competitive. Properties are purchased sight unseen which can be a Pandora’s Box of sorts. Some former owners, faced with eviction, may have caused either superficial or serious damage to the home. Hardware or appliances might have been removed, carpet destroyed, holes put in the walls, or the plumbing or electrical system destroyed.

Homes that reach bank-owned status are often in a state of disrepair. Banks usually repair the worst of the damage and then sell the property as is. There are no disclosure regulations in this type of sale so thoroughly inspect the property inside and out. Spend money on an inspector but have realistic expectations. Banks are unlikely to resolve any findings and the inspector might miss a hidden issue that ends up being extremely costly. Construct a realistic financial framework of what it will take to make the house livable and more. Know that buyers often have to arrange and pay for utilities to be turned on for an inspection.

There is often only one realtor involved in REO sales. Buyers can work with the bank’s broker in charge of selling the property instead of with a buyer’s agent. Know what comparable homes in the area are selling for and whether or not the potential for a bidding war exists. Include a “subject to” clause in your offer that will release you from buying the property in the case your lender’s appraisal doesn’t meet the expected sale price. That being said, bid competitively – the bank loses money every day they own the home.

Line up your financing and earnest money ahead of time. A lender’s preapproval letter is a must for these transactions. Understand that financing restrictions exist for foreclosures. Cash bids are more competitive than financing, even with bank-owned properties, and having the condition of selling a current home is a double whammy. Also, buyers might have more upfront costs because banks will not pay for things often covered by traditional sellers. Expect a longer process. There are extra steps required for the bank to release the property. A flexible purchasing timeline is a must when purchasing a foreclosed home.

Whether purchasing a foreclosed property from an auction or bank, assume that in addition to larger cosmetic or structural issues, there has also been a lack of basic maintenance. If the property has sat empty for a long period of time, no utilities will be on, there may be water damage, overgrown grounds or evidence of vandalism. On the upside, foreclosure properties are often vacant which allows for a timelier move in process. (It IS recommended buyers rekey all locks upon possession of the home.)

For the best experience in purchasing a foreclosed property, do your research, keep realistic expectations, and work with a realtor familiar with the complexities of the foreclosure market. I would love to work with you as you go through the journey of buying a home - contact me today!