If your goal is to purchase the property as a primary residence, buying a foreclosure property might be a good idea. If you’re an investor, however, purchasing a foreclosure property might not be the best venture to embark on.
Should You Buy a Foreclosure?
Buying a foreclosure is often declared as a way for both owner-occupants and investors to get a great deal on a property. However, the potential financial rewards of buying a foreclosure don’t come without hard work. The most important thing to understand before jumping into the foreclosure market is that these properties were given up by owners who couldn’t afford the payments anymore.
In these cases, the house is often poorly maintained—after all, if the owner can’t make the payments, he or she is likely falling behind on paying for regular upkeep as well. Also, some people who are forced into foreclosure are embittered by their situations and take out their frustrations on their home before the bank repossesses. This often involves removing appliances and fixtures, and sometimes even outright vandalism. After the occupants leave, foreclosures sit abandoned, often inviting criminal activity.
If you’re considering purchasing a foreclosure to live in as your primary residence, here are a few important steps to follow:
1. You’ll want to hire an agent. The bank in this situation is the seller. The bank is going to pay your agent’s commission regardless, so you may as well have an experienced person to help you. Plus, if you don’t hire one, you aren’t going to get the extra savings from the sale. For example, many people try to avoid using an agent because they don’t want to pay commission to an agent. When buying a foreclosure, the bank isn’t going to give you the extra money that you would theoretically save. All in all, it’s free essentially to hire a real estate agent. Of course, you’ll hopefully want to have a good one.
2. Do not expect to steal the property. Banks are notorious for wanting to suck every last dollar they can from the property. Many people think banks are so eager to get rid of a foreclosure property that they’ll sell it for whatever. This simply isn’t true. The bank actually isn’t going to negotiate a lower price any more than a seller would. Of course, you can try to offer significantly less than the listed price, but do not expect the bank to accept your offer!
3. Get a home inspection. Home inspections run a few hundred bucks, but in the long run, they’re valuable.
4. Be willing to walk away. This one is important. Many times, something negative will come up in the inspection report, or the bank won’t lower the price, or voice any negative problems with the house that an inspector is sure to find. Again, this is why it is so important to hire an inspector. The bank is going to be selling the property as it is; anything wrong with it, they don’t have to disclose. If you’re willing to walk away from the deal, it’s going to be a heck of a lot easier to make a sound decision regarding the property. Don’t fall in love with a house.
If you’re a regular real estate investor, is it a good idea to purchase a foreclosure? The most straight-forward answer here, is no. Wise investors shy away from purchasing foreclosures. There are a few main reasons. What are they? Well…
Just about every foreclosure is listed on the MLS; because of this, everyone else already knows about the deal. That includes your average retail-buyer who is prepared to pay more than an investor will. If you’re a wise investor, you’ll invest in deals that don’t bring in any competition. Foreclosures as they are are extremely competitive.
It can be difficult. Buying a foreclosure is tough. You’ve got to provide earnest money with the offer; also, the bank requires you to use their contract. You’ve got to agree to their terms. You’ve also got to put a down payment on the house. There is little to no flexibility with a foreclosure property. With non-foreclosure house, you can come up with all sorts of creative ways to where you don’t have to put down earnest money, you don’t have to put down a down payment, and you can negotiate the price significantly. Not so when you are dealing with a foreclosure.
Dealing with the bank won’t be fun
Banks are not fun to deal with as a property seller. Again, they do not have to (and won’t) provide any information about the house that would cause you serious stress and money later on. This ranges from plumbing issues, to title issues. Title issues can be costly to fix. And, even if you get a bank to agree to fix something in writing, it doesn’t mean they’re going to do it. Are you going to take a bank to court? Probably not.
Another problem that foreclosure investors become irritated by is that most banks have intentionally lowered the amount of foreclosures that they are willing to put on the market. They are intentionally reducing the supply of foreclosures on the real estate market. There are actually many buyers that are paying more than list price for homes since single-family homes are on the rise. This means that purchasing a single-family home is very advantageous to a real estate investor. In closing, whether or not purchasing a foreclosure is a good idea can go either way, and is specific to each and every scenario.
Typical issues with a foreclosure property:
Maintenance and Cleanliness
Maintenance and cleanliness can be a problem in foreclosure properties because of the circumstances under which the previous owners moved out, and because of the time, the house may have sat empty. Some of the main concerns include:
Lack of Cleanliness
Bank-owned properties are sometimes disgustingly dirty because of time spent sitting empty, intentional neglect by the previous owners. When the place is locked up with no air circulating for months, built-up dirt can cause the entire home to smell.
The previous owners may have made changes to the home without getting the proper permits or hiring good labor to save money. A common example is converting the garage into living space so more people can live in the home and help pay the mortgage.
These changes may be undesirable to future owners or create headaches for the new owners with city government officials due to the lack of proper permits. Either way, many people cut corners when renovating a foreclosure property, so that they can make a higher profit while spending less. Here’s a perfect example:
If the previous owners started to improve the home but then fell on hard times, there may be partially finished work in the house. The bathrooms may be redone while the kitchen has not been updated in 40 years, or there may be new floors in the living room while the bedrooms still sport ancient carpeting. Also, if any repairs were made, they may have been done by the owners themselves or by unlicensed professionals — in other words, people who may not necessarily have done the work correctly.
With no one living in the home, the electricity may be off unless the bank has intentionally kept it on. With no electricity, it can be hard to see what you are buying in some rooms, particularly basements and windowless bathrooms.
A small leak under the kitchen sink can lead to a mold problem, and a roof leak or burst pipe can lead to major water damage. With no one around to take care of small problems as they occur, small problems can turn into big ones, and big problems can turn into disasters.
Lack of Basic Maintenance
If the previous owners couldn’t afford their mortgage payments, you can bet that they also could not afford to repair leaks, termite damage, a broken garbage disposal or anything else.
Dead or Overgrown Yard
Depending on the climate where the home is located, the lawn and landscaping may be totally dead or extremely overgrown. Banks usually do not pay for gardeners to maintain the yard.
Personal Property Left Behind
Sometimes foreclosed homeowners get locked out of the property before they can move their belongings, and in some cases, they do not take everything with them. Many real estate-owned (REO) properties contain furniture, trash, clothes and other items that you will be responsible for disposing of when you become the property’s owner.
Sometimes when a property sits vacant, especially if it is in a moderate-to-high crime area, new owners will have to contend with graffiti, broken windows and other damage.
Broken windows can be common in REOs for several reasons. As mentioned previously, vandalism could be a cause. Also, when banks lockout owners while taking possession of the property, the former owners may break a window to get back in and retrieve their belongings. Previous owners may also purposely inflict damage at the bank’s expense by putting holes in walls and/or tearing off the baseboards and crown molding.
Removal of Valuable Items
To get revenge against the bank and to make an extra buck, the previous homeowners might remove items that had value, including appliances, fixtures, the kitchen sink, bedroom doors, closet doors, copper pipes and more. Anything the homeowners do not take might be taken by thieves. Either way, many bank-owned properties are missing things that generally come with seller-owned properties.
So, should you buy a foreclosure property?
Despite all these potential problems, foreclosures can still be a good deal. If you are willing to fix problems that most people do not want to deal with, you can buy a home at a significant discount. However, you may encounter additional issues when it comes to actually purchasing the property and getting it in move-in condition.
You’ve got to know what you’re doing and pick the right house if you don’t want to lose to your savings. Always assess the condition of the property. Most residents of foreclosed homes are not too happy about their eviction, and many physically take out their discontent on the house itself. Missing plumbing, holes in walls and broken appliances are all common, and as many as half of all foreclosed properties have major damages from a former owner. Even if there’s no intentional damage, foreclosing on a home is a lengthy process (often taking a year or longer), so it’s pretty much guaranteed that the property hasn’t been properly kept up for at least 12 months. Many foreclosed homes have serious issues like cracked foundations or leaky roofs that can be quite costly to repair.
Choose the right property
Because you’re not the only bargain hunter out there, you’re going to have to move fast to secure a property, leaving little time for a proper home inspection. In fact, many people buy foreclosed homes at auctions, sight unseen. That’s a risky gamble for a company or a wealthy investor, but it can be disastrous for someone who’s hoping to make a quick profit by flipping the house or for budget-minded home shoppers.
Say you find the perfect foreclosed property; you need to come up with a way to pay for it all. Even if you’ve got a good job and a great credit score, financing a foreclosed home can be extremely difficult. Many houses bought at auctions have to be paid for in full within 24 hours. You might be able to get financing for a loan under normal circumstances, but it’s tough to come up with that kind of cash on such short notice.
Now, this only applies to those looking to flip the property, but you need to realize your great fixer-upper could take a while to sell. Home sales aren’t exactly breaking records right now (at least, not in a good way), so even if you find a house at a great price and fixing it up is as cost-effective as you could hope for it to be, it could sit on the market for months, maybe even for a year or two. During this time, you’ll be the one paying for utilities, taxes and insurance, all of which will severely cut into your profit margin.
What’s the verdict? Buying a foreclosed home can be risky, and you might be better off buying a house without all the troubled history. It’s a buyer’s market for those too, you know.