Take The "Scary" Out Of Buying A Foreclosure

Foreclosures are almost always intriguing. Neighbors, real estate agents, investors, and potential buyers are all curious. It's imperative, before proceeding with a purchase, to know the home is in good enough condition to be financed, as lenders will not give a loan on a home deemed "unlivable". It's also best to know your financing options as you sort through the foreclosure options. You'll be looking at several homes, and some of them may need repairs.

I've seen the full gamut in condition:
from excellent and move-in ready, to needing paint, flooring, and appliances, to mold growing over two inches tall on the basement floor.

I always advocate being an informed buyer, and a foreclosure is certainly not an exception to this rule. Not only does the condition of the home matter, but so do title defects, possible insurability issues, and all the "consequences" that you cannot see from a visual inspection alone. It's a good idea to spend $300-$500 for a qualified home inspector with a good reputation, and also wise to speak with a licensed contractor to get an idea of any potential repair costs.

With that in mind, be sure to work with a mortgage professional who understands foreclosures, and has a myriad of options available should your dream home need some work to bring it back to an acceptable condition. A home that needs renovations will probably need a different loan program than one that does not. Don't worry -- even if the home is deemed unlivable in its current condition, there are renovation loan programs available to "bring the home back to par".

Working with the listing agent is not always the best option. If ever there is a time for your own real estate agent representation, it is on a foreclosure purchase. Find a knowledgeable foreclosure buyer's agent who can help you understand the benefits, pitfalls, and interesting points. (Email or call me for a list of real estate agents that I work with and trust.)

Benefits
There are some great benefits that can be had when purchasing a foreclosed home. The sales price can be less than fair market value (sometimes significantly less). The condition can be better than you expect. Sometimes, little to no work is needed. Other times, the work needed can be fairly minor and cosmetic in nature, where a little sweat equity and a trip to Lowes is about all that's needed to bring the shine back.

Pitfalls
There can be some doozeys. On occasion, the pricing on a foreclosure is higher than similar properties that are not foreclosures, and this is usually due to the added costs the banks assume in legal fees, maintenance costs, and taxes. The title also needs to be clean (not just marketable), or you may have problems financing and/or selling the home in the future.

The condition of the property can be worse than you expect. Some former owners vandalize the home, stripping the home of its essentials: cabinetry, mechanical systems, copper pipes, bath fixtures, lighting, and even flooring. Foreclosures can also sit vacant for a good while, causing a minor problem to blossom into a major one because there's no one in the home to catch the issue before it turns into a big headache. The repairs needed can be extensive, even sometimes structural.

And, finally, hearing back from the seller on your offer/counteroffer can sometimes take a while, so be patient. There's no guarantee that buying a foreclosure will save money over buying a non-foreclosure, but patience and prudence can pay off in a big way.

Interesting Points
As mentioned above, buying a foreclosure takes patience, homework, and sometimes a measure of luck; you should be twice as diligent with foreclosures.

    • In regards to title, there is a distinct difference between "clear title" and "insurable title", as an insurable title is not necessarily a clear title. Please work with a title company independent of the seller so you know the complete picture on the home's title from a company with ties only to you. Foreclosure auctions, in particular, can be risky, as there is rarely a guarantee of insurable title and you must close within a certain time period.

    • Your deadline isn't necessarily the bank's deadline; if you're on a tight deadline, be it a lease expiration or school schedule, the longer than usual process time line may not meet your needs. If you're under the gun to make a quick decision, a foreclosure may not be for you, unless you can make alternate arrangements for housing while the process plays out.

    • To provide yourself additional protection, ensure the contract gives you a way out if the property's condition is worse than expected, inspectors find damage that requires more than a certain dollar amount worth of work, or a title search uncovers additional liens above a certain dollar amount. It's better to walk away from a home that has major issues than to wind up owning a money pit.

  • Before you proceed, make sure the foreclosure you're looking at is the right purchase for you. If you do not get the contract on one, something else will come up. There are numerous foreclosures on the market today, and you can easily find them through free foreclosure search lists. On top of it all, working with the right team of seasoned foreclosure professionals (real estate agent, mortgage, title, home inspector), you will find a great fit for your needs.