It's a fantastic time to be a home buyer in today's real estate market. Foreclosures, REO properties, short sales and abandoned homes can be found in every neighborhood.
Foreclosed properties offer buyers a unique opportunity to purchase a home at a deep discount. Buying a foreclosed property also comes with multiple hurdles that most buyers aren't aware of. Before you make an offer on a foreclosed property, let's take a deeper look into this exciting segment of the real estate market.
A foreclosure is a home that was repossessed by a bank after the home owner was unable to make their mortgage payments. Buying one of these properties is much different then a traditional real estate transaction between a home owner and a buyer.
It takes a special kind of buyer to purchase a foreclosed property. Here are several questions you need to answer prior to making an offer on a foreclosed home.
Do you mind doing major repairs?
As you can imagine, having the bank take away your home can be a stressful time for a homeowner. Many abandon the house quickly and leave the property in disrepair. Many foreclosed homes are full of the old home owners furniture, possessions, trash and even pets!
You really never know what you will find when dealing with a foreclosed property. "We've seen vandalism. We've seen previous owners steal cabinets and fixtures. Copper piping has been stolen." Says Bill Richardson, home inspector from American Society of Home Inspectors.
These properties can range from clean and neat to completely trashed and disgusting. Sometimes thieves will take advantage of a house being vacant and they will steal everything inside including the pipes in the walls!
Brendon Desimone from Zillow.com explains that “some people who’ve lost their homes to the bank are stripping the property bare, hoping to sell the appliances to recoup at least some money.”
Most properties are abandoned so you will often encounter overgrown yards, water damage as well as frozen pipes. Electricity is usually turned off so be sure to bring your flashlight to inspect the property. Also, there will be no heat so wear a coat when viewing homes in the winter.
It's best to bring a realtor or someone else with you to view foreclosed properties. Abandoned homes are sometimes occupied by homeless people or criminals. It's better to play it safe and bring someone with you on showings.
You might have a major renovation project on your hands if you purchase a foreclosed property. This includes cleaning out trash, updating older features in the house as well as major upgrades such as a new furnace or a new roof.
When a homeowner can't afford their mortgage, most of the time they can't afford to keep up with standard home maintenance either. It's an unfortunate situation, but just know that if you purchase a foreclosed property you will be doing some work. Very few will be in move in condition.
Another import thing to remember is that you will not be dealing with a typical seller. The property owner is now the bank and they will be selling the property “as is.” This means that the bank will not be performing any improvements to the property.
In other words, what you see is what you get. In a traditional sale you can request the homeowners to make certain repairs as a part of the negotiation process. Some buyers expect a property to be in excellent, move in condition. If you are this type of buyer then a foreclosure is not for you.
Hiring a qualified home inspector to thoroughly inspect the property is especially important when purchasing a foreclosure. You don't want any surprises after the sale. If there is anything that you miss after the initial inspection it could cost you thousands of dollars in repair costs.
Do you have cash?
Another issue that comes up when purchasing a foreclosure is obtaining financing. Many banks will refuse to lend a mortgage on a property that is in bad condition. There are unique lending programs available such as the 203K Rehab Loan. With this mortgage program, the bank will lend you money for the purchase price as well as money for renovations.
Be sure to consult with a mortgage professional prior to looking at foreclosed properties. They will discuss the different mortgage options available for you.
Even if you do get approved for a renovation loan, you will then be responsible for managing the renovation project. Will you do the work on your own? The bank will want to see licensed contractors doing the major renovation projects. The bank is concerned with protecting their investment. If they are lending you money for repairs they will expect it to be done by professionals.
Another option is paying cash for the property. If you are in a position to pay all cash for a property that is great! But not everyone has that kind of capital laying around.
Do you have time?
Another unfortunate aspect of buying a foreclosed property is the time it takes to close the deal. The sales process for purchasing a foreclosed property is often much longer then dealing with a traditional seller.
In most cases, a traditional home seller will be very quick to answer all of your questions and make a deal. They are usually just a phone call away.
When purchasing a foreclosure, you will be negotiating with a bank. Unfortunately, banks are often much slower to respond to emails, phone calls and offers.
When buying a property from a home owner, it is a very personal experience for them. They are very interested and involved in every step of the sale. When dealing with a bank, your offer is just another file sitting on a desk.
It's important you work with a realtor who is experienced with purchasing foreclosed properties. Your realtor will be sure that you submit your offer to the bank with all of the proper paperwork. If you are missing any of the key documents the bank will immediately reject your offer.
“While enterprising do-it-yourselfers can certainly get away with going through the traditional home buying process without an agent, foreclosed real estate is another matter. Such complex transactions require the expertise of not just any real estate agent but one with a background in buying and selling foreclosed homes.” Says Luke Mullins of Money.com
Some foreclosed properties receive hundreds of offers! These offers can pile up on a desk and sit there for months before being evaluated by the bank. In the end, the will usually pick the strongest buyer that can close quickly with few contingencies.
Banks love to see cash buyers that can close quickly and don't require any home inspections. Are you capable of submitting that kind of offer? It's usually the experienced real estate investors who can submit these strong offers.
A professional real estate investor can afford to wait months for a reply from the bank. They most likely have offers in on multiple properties at the same time. A typical home buyer with a mortgage is at a disadvantage compared to investors offering cash.
Are you willing to wait several months to get a response on your offer? What if the bank rejects your offer after waiting all of that time? This can be extremely frustrating for a buyer.
If you are submitting an offer to a bank, it's best to make it a strong offer with very few contingencies. Then be prepared to wait...
Despite all of these issues, there are still huge opportunities in buying foreclosed properties. You just need to have the patience required to do the deal as well as the ambition to turn a distressed property into a beautiful place to call home.