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Risks when buying foreclosed homes

Posted by Hughes Group Blog Team on Wednesday, August 29th, 2018 at 2:03pm.

While buying a foreclosed property can bring big financial rewards because the property is usually being sold below market value, there are risks and the buyer should be aware of those risks before proceeding with the purchase.

While a home is in preforeclosure, which is the time when the owners are behind on their mortgage payments but the foreclosure isn’t finalized by the bank, the home is probably in better shape than you may find it later in the process. Unless the owner is upside down with their mortgage, this may be a time that you can get a good deal from owners desperate to avoid foreclosure. We once purchased a home that was close to being foreclosed on by paying off the owner’s loan. We were able to do that because we had cash and didn’t have to wait for a loan to go through.

Another way to purchase during the pre-foreclosure period is through a short sale. A short sale is when all parties that have a financial interest in the property agree to sell for less than what is owed. This can be a lengthy process as there may be many financial institutions and lienholders involved. It can take weeks after the initial offer is made to even receive a reply. The upside is that typically these homes tend to be in better condition because the owners are still on sight to do upkeep. They are also usually listed for sale and so the owners try to make them show well. However, there is risk that the sell may fall through if the owner is able to come up with the money to clear up their mortgage.

After the home has been legally foreclosed on, it can then go to auction where house goes to the highest bidder and is usually a cash only purchase although sometimes you can put earnest money down with closing usually within 30 days. Homes going to auction can have the utilities turned off and the windows boarded up so you may not be able to inspect the interior. There may be expensive surprises inside.

Sometimes, when a home is foreclosed on the owners or vandals may remove anything of monetary value such as appliances, copper wiring, doors, etc. There may be intentional damage made by unhappy owners or vandals. You may find holes in the walls, graffiti, toilets plugged up or a variety of other things that require expensive repairs, so you want to make sure you have enough cash to fix these things as banks don’t typically like to loan on distressed properties. The house may have the previous owners’ personal belongings left that you will have to dispose of. You may also find unknown fees like unpaid taxes or liens so be sure to do your research.

If the home doesn’t sell at auction it becomes Real Estate Owned (REO) or bank owned. The bank will then put the property on the market at a below market price which makes them very attractive to prospective buyers and investors. Banks usually want to clear these properties from their books and the price will reflect that which can bring in many interested buyers. If you decide to try and purchase an REO remember that this also may take a while. Banks don’t always respond quickly and there may be multiple offers which could drive up the price quickly moving it from a great deal to a not so great deal to a bad deal.

The benefit to purchasing at this stage is that the banks have generally cleaned up any tax or lien issues and have had agents clean out debris and personal belongings. They don’t, however make repairs and you generally can’t include repairs as a condition for buying. These are “as is” purchases which means that you agree to accept the property in its present condition, leaving the risk of unforeseen issues in your lap or pocket as the case may be.

Unfortunately, unless the previous owner has been locked out, you may have to deal with owners who are reluctant to leave. I once accompanied a buyer and her realtor after closing to walk through the property and opened a bedroom door to find a relative of the previous owner asleep on the bed. In another room was a child taking a nap. All the furniture and personal belongings were still in the house. Fortunately, the realtor was able to take care of it but it still took an extra week for occupancy to take place.

If the home is government owned such homes financed through FHA, VA,SBA, Freddie Mac or Fannie Mae, IRS you may be able to save money and sometimes they will be able to assist with financing but understand the if you buy from the IRS you will need to pay cash in full. When you buy a home that is not distressed financially, you are able to get a disclosure that tells you of any issues that the homeowner is aware of with the property. When you buy a foreclosed home you won’t get this information because the bank hasn’t lived in the house and doesn’t know if the dishwasher is working or if there have been leaks in the roof. And even if they did, they have no obligation to tell you. A home inspection is critical to help uncover problems before you close. Because the bank is already selling at a reduced price they will not always agree to fix issues or reduce the price, but if it has been on the market for a long time or if the issues are likely to impede a future sale if you back out, they may be willing to negotiate. It doesn’t hurt to ask.

All in all, buying a foreclosed home can be very appealing. Just be sure to do your due diligence.

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