What are the downsides of buying a home that is in foreclosure?
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If a home has been foreclosed on then it is owned by the bank and the bank has no idea what kind of shape the house is in. So, what you see is what you get. The furnace may or may not work. The roof might leak. The electrical system might be blown. Etc. The bank has no idea and therefore can't tell you what is wrong with the house. That would be the main thing to consider. Look the house over yourself and have a home inspector check it out.
Well #1 most foreclosures are purchased in a bidding process. The chances of someone novice getting a good deal is pretty slim.
#2 foreclosure tend to be rough, meaning the former owner knew they were losing the home, so why take care of it.
There is a lot more to this kind of purchase than I described here. What I would suggest if you are interested in purchasing these, is to find a Realtor who is VERY WELL versed in the process. Check references on the Realtor. After a few purchases you will probably be able to purchase on your own.
A foreclosed home is sold for the mortgage plus any other outstanding liens. Often it is a second mortgage being foreclosed so the amount seems really low. If a second is foreclosed, the first must still be satisfied. There may be other outstanding liens also. You should always get a title insurance policy when purchasing a foreclosure. You can make money buying foreclosed homes but it is not the cash cow it is portrayed to be. Many people lose money buying foreclosed houses also.
There are two ways to buy foreclosed homes. The first is at auction and the second is buying real estate owned (REO). REO's listings can be obtained from the MLS, bank websites and government websites.
In order to purchase at auction, you would personally go to the auction and you will need to have 10% or 20% of the bid price down (by statute in your state). The balance will be due in 30 days. If you can get a mortgage on the property, you would have to be pre-approved to obtain the funding in that amount of time. However, foreclosures are often not eligible for financing because of the condition they are in. You would have little or no opportunity to inspect the property prior to the auction. If the property is occupied, you may not even be able to inspect it after the auction. Backing out due to problems with the inspection may cost you the deposit depending on your state.
Buying REO properties provides a little more safety but, by this point, there may be many people looking at them. There probably are bargains to be found. I have seen HUD homes that need repairs go for more than comparable homes that sell in the traditional market. I guess people think they are getting a bargain. With a bank REO, they will want proof of funds to close before they will consider your offer. That means you will have to have cash or be pre-approved for a mortgage on terms that are acceptable to the bank which holds title. Getting financing on a distressed property is not always easy. There are many foreclosures that need little or no work. Most need some work, some need major work. Obviously, the amount of work required to rehab the property is one of the major considerations in pricing.
Remember that you will need about a 10% cushion for the costs of sale. That means you have to purchase a property for at least 20% under market value to make any profit at all.
Good luck.
I am a Realtor in Las Vegas so what I am about to tell you is probably biased towards Nevada law even though I will try to make this generic. I have clients buying foreclosures and, based on my experience, I feel that there are three general areas of concerns on buying foreclosures.
Right Of Redemption - Depending on the type of foreclosure, the mortgagor (the borrower and owner of the property) may have what is called a “right of redemption period”. What this means is that even though you purchase the property (at a tax sale for example), the mortgagor may have a period of time in which to buy the property back (right of redemption). If you made improvements during this period of time, you are not compensated; you lose. So, the first thing to do when considering a foreclosure is to ensure that you get a clear title and that there is no right of redemption.
“As Is, Were Is” - When you purchase a property in Nevada, the seller has to provide a state mandated set of disclosures. These disclosures are detailed questions and designed to give you a true picture of the state of the home you are buying. In Nevada, if you fail to disclose something, the buyer can collect triple damages (3x) for non disclosed items. This makes buying a home in Nevada reasonably safe. However, when properties are foreclosed, the banks who now own them have no knowledge of the property. They therefore sell the property “as is, where is.” What does this mean to you as a buyer? You need to have full inspections and I recommend knocking on neighbors doors to see if they know of any problems. I have also tracked down (through tax records) and called the previous owners and asked them about the condition of the property. How big is the risk? It depends. If you are buying a home in an established subdivision and you get good information on similar homes and such, I think the risk is minimal. If you are buying a one-of-a-kind and you skimp on inspections, your risk could be significant. After all, with an “as is, where is” property, whatever problems you discover after you buy the home are yours to repair and you will have no recourse on the seller.
“Property Condition” - Most of the foreclosed homes that I have seen (between 50 and 100) need substantial work/investment up front to make them livable. Sometimes the homes are priced according but most times they aren’t. I have seen cases where the “as is, where is” foreclosure is significantly higher than a similar property in excellent condition. So, just because a home is in foreclosure does not mean it's a good deal! That is why I encourage people to not seek foreclosures. I encourage them to look for the best deals (usually the lowest $/SqFt for similar homes) and if it happens to be a foreclosure and the condition, price and added risk of “as is, where is” merits the price, then that’s the best deal. However, remember that the money needed to make a damaged property habitable will not go into the loan; it will come directly out of your pocket (cash). So, I feel that the savings has to be considerable to warrant a damaged property (whether foreclosure or not).
All the above said, if you find a foreclosure, with no right of redemption, the inspections tell you it is sound and the property condition matches the price, go of it. My clients have not encountered any special issues getting financing or anything else buying foreclosures. So, just watch out for the three above issues.
I hope this helped.
Eric Fernwood
Eric@ISellLVHomes.com
http://www.iselllvhomes.com/
To understand the downside of buying a home in foreclosure you have to understand the foreclosure process.
In most states the foreclosure process is regulated by strict laws. The process of foreclosure usually takes about 5 to 6 months, not including the time to actually evict the former owner or his tenants. During that period of time the owner of the property is allowed to cure his default. He can usually do so until about 5 business days prior to the sale. If he goes beyond that point he can only cure by paying off the entire balance.
In most foreclosures where the auction price is "below market" the owners will refinance, sell, or file for bankruptcy long before the date of the auction. What this means to you is that you will investigate a hundred foreclosures before finding one that actually goes to sale.
Bidding at a foreclosure sale can be VERY tricky. Remember - it is not always the first deed of trust that is being foreclosed. So if you see a foreclosure auction where the price seems very low, the chances are that the foreclosure is on a second or third mortgage or deed of trust. If you bid at such an auction, you will not be buying a first position, you will be buying a second or third position and will take the property "subject to" any prior liens, mortgages or deeds of trust. If you intend to bid at a foreclosure, you should ALWAYS get a preliminary title insurance policy or have your attorney check the title and tell you what you are bidding on.
Even if it is a first deed of trust, and even if it is a bargain, the property may be a toxic waste dump and as the purchaser at a foreclosure sale you would be required to clean it up. The property may contain a burned out structure that needs to be demolished, and you will have to pay to demolish it. If it is vacant land, the property may be an undersized lot or otherwise unbuildable. If it has a building on it, the building may have extensive dry rot, termites or other problems. Once you purchase it you will have to repair this damage. You don't get to inspect the home prior to bidding and you have to take it "as is". Obviously, if the home is occupied, you will have to evict the tenants. This can take two or three additional months and can cost you a couple of thousand dollars in attorneys fees and costs.
In some instances the property may be subject to "redemption" buy the former owners. That means that even after you buy it at the foreclosure sale (and sometimes for up to a year thereafter) they have the right to pay you what you invested, plus a reasonable rate of interest, and "redeem" the property. (i.e. they get it back.)
Last, but certainly not least, is the fact that you must pay all cash at most foreclosure sales. No bank will usually finance such a purchase.
I own a foreclosure company, and my advice to you is to contact the REO department of your local bank or Savings and Loan.
After a bank or S&L forecloses and takes back property, they evict the occupants and put the home up for sale. The REO department handles these sales. Federal law prohibits them from holding onto too much foreclosed property, and they are usually anxious to get rid of them. These properties are usually priced below market and you get to inspect the property and can usually finance the property through the bank that did the foreclosure.
Hope that helps!!
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