It’s a tempting proposition: A deeply discounted home in a neighborhood you like. Buying a foreclosure can be a great opportunity, but proceed with caution. There are many pitfalls that can turn your dream deal into an everlasting headache. If you are buying a foreclosure? Do your homework! Here are some things to think about before you take the plunge.
What Is A Foreclosure? There are three classes of sale that people commonly refer to as a foreclosure: a pre-foreclosure/short sale, a foreclosure, and a bank-owned property/real estate owned (REO). Each one presents an opportunity for buyers, although in the pre-foreclosure stage the current owners still have the option to make loan payments and stop further proceedings. If they decide to sell, and the lender agrees, the home will sell for less than the amount due on the current mortgage. The lender takes a loss, or is “shorted” on the sale. In a foreclosure situation, the property will be sold at auction. You’ll need to be prepared to pay cash – financing may not be an option – and you may not be able to have a professional home inspection. If the property doesn’t sell, it becomes bank-owned. You’ll be able to finance the home and have an inspection, but you will have to meet very strict contractual deadlines to close the purchase.
Know The Market. How will you know if you’re getting a good deal if you don’t know what other homes are selling for in the area? Do your online research. You can use sites like Zillow, Trulia and Realtor.com to compare listing prices and see price estimates. (Not all states disclose property sale prices so you may not be able to see what buyers actually paid.) On some sites, you can enter the search term “foreclosures” and find properties in this category.
It’s Going To Cost How Much? A foreclosure may look like a great bargain, but remember you will have expenses that can range from major structural repairs to cosmetic improvements. If you buy a foreclosure for $150,000, spend several months and another $100,000 renovating it, and the average price for a home in the neighborhood is $200,000, it may not be such a deal. Know what you can afford, set a budget and stick to it.
Expert Help. With what you’ve read so far, you’ll probably agree that you need all the expert help you can get to make this purchase work. Your team should include a lender, a Realtor®, and a home inspector. Depending on the circumstances, you may want to add a pest inspector or a well-water testing company, and other professionals as needed.
Lender. First things first. Start with a lender. No matter if you are making a conventional home purchase or following the foreclosure path, you need to know how much you can afford and what loan options are available. Even if you think you are going to pay cash at an auction, talk to a mortgage loan originator. Circumstances can change rapidly and you’ll want to be ready. Furthermore, you can show your Realtor® that you are a serious buyer – see the next point!
Realtor®. This is not the time to go it alone. You need to work with a real estate professional who understands foreclosures. Foreclosure specialists will not only know what’s on the market now, they’ll probably know what’s coming. How do you find a Realtor® who understands foreclosures? Go back to your internet search and see whose names pop up in association with foreclosure listings. As a plus, they’ll have recommendations for contractors and other tradespeople you’ll need to fix up the home.
Inspect, Inspect, Inspect. You can’t expect someone who is losing their home to focus on home maintenance. In addition, the property you’re looking at may have been vacant for months, or even years. Don’t take any chances. You’re buying the home on an as-is basis, which means the seller isn’t responsible for broken pipes, a leaky roof, or black mold. Spend the money on a home inspection so you know what’s wrong, and can decide if it’s worth fixing. (The inspector can’t tell you what repairs will cost, but armed with the inspection you can talk to contractors and get a better idea of the expenses you’re facing.) Need to find a certified inspector? Start here.
Title. Be aware that buying “as-is” can extend to the property title. Title may not be clear (property indisputably owned by the seller) when you buy, and issues, such as unpaid property taxes or HOA dues, could take months to resolve. Consult with a real estate attorney or title company before you buy to find out what you can do to protect your interest.
It may take more than one try to secure a foreclosure. Stay positive and keep looking if you don’t get the first one – or two – or three that interest you. Don’t be afraid to walk away, either. Whether you are buying it to live in, rent, or flip, it has to be the right choice for you.
Senior Vice President | Collateral Services