While first-time homebuyers are attracted to the low price tags of foreclosed homes, they come with a number of risks. Buyers should account for these problems before they make the difficult decision of purchasing a foreclosed property.
Where to Find Foreclosed Homes
Foreclosure sales are different from real estate sales, so be sure to locate an experienced real estate agent who specializes in home foreclosures. Try viewing public records and calling local courthouses to see when foreclosed homes will be sold in your area. Look online for property listings and narrow your search to what you are in the market for.
The low asking price of the property does not factor in all of the expensive repairs you may need to undertake later. Calculate the cost of all the repairs and include that number in your offer when you are considering purchasing a property. If you plan on subletting the property, save enough money in case the home is not immediately rented after the repairs.
Research the Property
Visit the property before committing to buy. Research how long the house has been vacant to get a sense of the extent of the maintenance problems. Think about the property value compared to other nearby homes. If there is a high rate of crime, and many nearby foreclosures, the home may not increase in value.
Go to the city’s building department to check past permits and records to verify the initial title report. Make sure to request the Seller’s Property Disclosure Statement to reveal any known maintenance history of the property.
Account for Risk
Foreclosed homes are frequently in a bad condition because the previous owner was forced to leave. Since the previous homeowner did not stay current on the housing bills, they most likely were unable to pay for maintenance or repairs, either. Sometimes previous owners intentionally damage the home prior to their eviction, from removing appliances to creating long-lasting structural damage.
Get It Inspected
Banks require that foreclosed homes be inspected before providing a mortgage. The conditions of these homes change quickly, and previous inspections will most likely have left out important issues. One of the most costly repairs in foreclosed homes involves broken plumbing pipes or leaks.
When broken plumbing is left unrepaired, whole floors and drywall may be rotten and moldy due to water exposure. When repairs are made early, it can result in saving you a lot of hassle and money down the road. You, as the buyer, will pay the repair costs, so do not expect the bank to foot the bill.
Finance Buying and Refurbishing Together
Apply for a 203(k) loan from the U.S Department of Housing and Urban Development to finance the purchase and repairs with one long-term loan. The money comes from a traditional lender, but HUD guarantees it will be repaid, making it easier and cheaper to obtain.
Obtain a letter of prequalification from a lender before you make an offer. Sellers prefer to work with a buyer who already has secured financing rather than wait around for one who needs to get loan approval.
Be prepared to wait several weeks for a response, because you are dealing with a bank and not an individual homeowner. Do not count on profiting from a quick resell, when the market turns around, without investing time and money into increasing the property’s value. Many cities have begun cracking down on absent and negligent property owners, charging penalties that increase over time.
Understand the Bank
When purchasing a foreclosed home, expect an impersonal experience from the bank. The bank does not follow any of the local standards in the real estate community. Instead, it has its own contract that guarantees its financial interests and puts nearly all the legal burden on the buyer by referring to the sale as “as-is.” Make sure to find a skilled attorney who can guide you through this process.
Know the Different Types of Foreclosed Homes
There are four different types of foreclosures: pre-foreclosure, auction, real estate owned, and government owned. Each of these sales has their own rules and conditions, make sure to research the foreclosure you are dealing with.
During pre-foreclosure, the homeowner still has control of the property but has negotiated with the lender to sell the house below market value. The owner vacates the property at the time of signing the short sale agreement. You can make an offer to purchase the property, but the lender has to negotiate with the homeowner to take less than the balance of the mortgage loan. Typically, short-sale homes are in better condition than foreclosed properties. The buyer has the right to inspect the property in advance without being able to ask the lender to fix any defects.
Auctions are typically cash only, which reduces the number of potential buyers. In most auctions, you are required to pay a cashier’s check for the full amount immediately. Some states allow a good faith deposit to secure the property, so read up on local laws. When buying an auctioned home, it is common not to have the right to view or inspect the property.
Real Estate Owned
REO is the easiest and most popular method of buying a foreclosure. Since REOs are so prevalent, the market is very competitive, and the prices are the highest. It is most likely the case that lenders want to immediately sell this distressed property, so they will price the property close to the market value. As a result, sellers typically do not negotiate with buyers too much over the price. Lenders are required to pay back-taxes on the property before selling, so it can be less risky than auctions.
The Department of Housing and Urban Development holds thousands of properties whose previous owners had mortgages that were insured by the federal government. Six months after foreclosure, HUD houses are sold, and local governments get the option to buy first. Then, homeowners have a ten-day period to bid on the property until the listing is opened to investors. The government updates its appraisals frequently, so you know you are getting a fair price.
Buying a foreclosed property can result in a bargain when done right, or a terrible decision when approached without thinking beforehand. Do not let the low asking price distract you from the potentially expensive repair costs. Set a budget, anticipate the worst, do your research, speak to a professional, and take it one step at a time.