How To Buy A Foreclosure

Since foreclosures comprise nearly a third of all home sales it seems timely to include a few things to be aware of when buying a foreclosure. Remember, there are both great opportunities and great pressures and pitfalls in this market. First, you have to decide at what stage of fore- closure you want to buy. There are three options: 1. pre- foreclosure; 2. sheriff's auction; 3. repossession, called REO (for real estate owned by the bank). According to RealtyTrac, an online marketer of foreclosure properties the safest and best way to buy is when it's a bank-owned property.

Pre-foreclosure: These homes are in the foreclosure process, but they have yet to be sent to auction. Owners are typically trying to unload them because they are "underwater," owing more on the homes than they are worth. As a result, potential buyers must negotiate a deal with the lender as well as the owner. That makes buying at this stage of foreclosure complicated and slow. But, you have the advantage of being able to inspect the home before purchase which isn't the case in other types of foreclosure sales. Prices are usually higher at this point than at other stages of foreclosure.

Sheriff's auction: These sales yield the lowest prices, but they are fraught with difficulties. Often the house is unavailable for inspection, leaving buyers with a long list of expensive repairs*and much larger bill than they intended. This stage is usually best left to the professionals, the contractors and investors who regularly bid on these places and know what they're doing.

Repossession: This occurs after the home has gone through a sheriff's auction but does not sell and the bank gains possession of the property. Homebuyers may not get the best bargains during this stage, but they can nearly always perform a thorough inspection before closing, minimizing costly surprises. Plus, the property comes with a clear title. In addition, the banks selling these places may extend preferential financing terms to the buyers and may have made some repairs before putting the property on the market. Even in this safer stage, though, homes are still usually sold in "as is" condition. This means the bank won't pay for cosmetic issues. Although, they will often pay for some or all of repairs that are health and safety issues which makes the home inspection even more critical. Also, since you're buying from a corporation, not an individual, the buying process can be faster, so be prepared to move quickly. Many times a listing goes on sale on a Friday and is sold over the weekend. The buyers and their agents need to be on top of everything from the inspection to the financing. Some banks will even charge a per diem fee for late closings.

Once you've decided which type of home to buy, there are several common mistakes foreclosure buyers should take care to avoid. These include:

Getting caught up in a bidding frenzy: The banks often under-price repossessions, hoping to generate excitement, attract multiple bids and sell them quickly. The problem is, as in any auction-type sale, bidders get excited and pay too much. Remember, there are 800,000 REOs in the banks' inventories. There'll be another home to bid on tomorrow.

Underestimating repair costs: Be aware too that many of these homes need serious repairs, and you don't always have a chance to check them out before bidding. If you can't get a thorough inspection, walk away. If you can, take full advantage of the home inspection and don't delude yourself about much the repairs will cost. Take along someone who can give you a good estimate of how much repair costs will come to. A suggested rule of thumb is to factor in a cushion of 10% to 20% of the purchase price to pay for unexpected repairs. And don't focus on short sales if you have to move quickly. Last year such transactions often took as long as six months. While some banks have streamlined the process, you can't count on a speedy deal.

Not knowing what comparable properties cost: This is important in any market but especially in this endeavor. In high foreclosure areas, prices can be eroding very quickly. You want to have the latest homes sale prices on repossessed properties and try to keep your bid comparable or lower.

Buying in a neighborhood flooded with foreclosures: This is most important for people buying for the short-term. Any neighborhood saturated with REOs and foreclosures may be headed for further price falls. If you're planning to relocate within a few years or buying a bigger house, that could mean selling at a loss. A better bet, if you can find it, is to buy the only foreclosed home in an otherwise stable community. That's more likely to hold its value.

On the other hand, if you're shopping in an area with a growing number of foreclosures, use that fact to wring price concessions from owners anxious to sell. And ask the homeowner to fix anything wrong with the house flagged in the inspection, or to give you a discount to account for it.

Not having financing in place: If you don't have a pre-approved mortgage, you're really not in the market. You have to be able to move quickly. Banks don't want to dilly-dally on sales; they're losing money every day that homes sit on the market. That means they'll often jump on the highest bid with the best financing already in place. Having a loan beforehand carries another advantage: It tells you how much credit you have available. You won't spend time shopping for homes that are too expensive. Remember that pre-approved financing is different from pre-qualified financing; it means the loan is ready to go. Pre-qualified is more like an opinion of a loan officer and there's still work to be done before final approval.

If you're in the market for a new home, you may be tempted by the low prices on bank-owned properties, which are going for about 30% less than seller-owned homes. But be prepared to come in with a hefty down payment (at least 20% to 25%) to compete with investors offering banks all-cash or significant cash deals.

Copyright 2021 Rod Haase.  All rights reserved.