Should you buy a foreclosure?

Posted by Matthew Lahti on Sunday, March 3rd, 2013 at 10:44pm

Some Think They're a Great Deal, Make Sure You Know What You're Getting.

In today’s market, where foreclosures are becoming as common as houseflies, buying a house in foreclosure might make financial sense. On average, a home in foreclosure sells for about 10-20 percent less than the market value of similar homes in the same location. Some properties sell for less than tax value. That could make all the difference to buyers who could not otherwise afford a home. Others see foreclosures as an investment opportunity to flip and resell, or to maintain the house as a rental property.

But amateur buyers should proceed with caution. A foreclosure carries serious potential risks. If you are just an average Joe wanting to get a good deal on a home for your family, a little bit of homework will go a long way toward preventing a costly mistake.

1. Get loan approval first.

Before you do any looking, get pre-approved by your bank or a trustworthy lending company. That will save you precious time that you will need once you find the property you want.

2. Liquidate assets for a down payment.

Most loans require some percentage for a down payment, so gather what you have before you start looking. When you know what you want, you will have the cash (or the check) ready to put on the table.

3. Use a Real Estate Professional.

Unless you have done this often, this is not the time to go solo. The details and legal aspects of a foreclosure vary from state to state, county to county, and even from case to case. A REALTOR will provide valuable advice and will think of details that would not likely occur to you.

4. Decide what stage of foreclosure you want to pursue.

You can buy a house in foreclosure in three ways:

-Pre-foreclosure means the homeowners have been told by the lending company that they have X amount of time to sell or they will lose the property. They will be motivated to sell for less so their home does not go to foreclosure. Buying a home in pre-foreclosure means you have to be ready to act quickly, but you will be able to view the property.

-Foreclosures sold at auction usually take place on the courthouse steps. Normally you will not be able to view the property. This is the riskiest way to buy a home in foreclosure. In most states, cash is required, and the new owner is responsible for any liens on the property. It may seem like the best way to get a good deal, but you will also have to compete against knowledgeable bidders.

-Real Estate Owned (REO) homes are properties that did not sell at auction and are owned by the bank or lending company. The bank pays a real estate broker to clean it up and sell for a profit, usually at or just below market price. The discount may not be as deep as those homes in the previous stages, but banks are usually willing to negotiate, especially if they have a number of these properties on hand. You can see what you are buying, although many homes in this stage are sold “as is”: nothing further will be done to fix it up before a sale. To the average buyer, the process of buying an REO property is much easier.

5. Be ready to repair and remodel.

Just assume at the outset that any home in foreclosure will be in need of some repair. If the owners could not keep up with the payments, they probably did not spend money on maintaining the property. If you have experience with all aspects of making repairs to a home, then you are in a good position to buy a foreclosure and fix what is needed. Hiring contractors will be more expensive. Either way, you will have the cost of materials, and that can add up to a significant amount of added cost to the total that you paid for the house. In the end, making repairs might be worth it, if you like remodeling, if the house is sound, and if you have ideas that you would like to try but could not afford to otherwise – and, of course, if the total cost of the house plus repairs is less than you would have paid for full market value.

6. Beware of hidden faults.

Even newer homes could be hiding serious structural imperfections. The most costly repairs to a home are often those that the amateur eye does not always recognize: replacing a roof, replacing the plumbing system, foundational and support beam repairs, rewiring, or replacing a septic tank. A home inspection by a professional can provide you with a better idea of what you are in for, if you are allowed to do one. Keep in mind that even a professional inspector might miss something major (hidden termite damage). If you are ready for these possibilities before you buy a home in foreclosure, then you can anticipate financially what you will be spending, and make a sound decision.

7. Keep a cool head.

It helps not to get too attached to a property. Any foreclosure that looks too good to be true probably is, or else the investor sharks would have snatched it up. If you are outbid on a property you really liked, keep looking. Sadly, the foreclosure market looks to be promising for an extended period of time .

8. Consider buying a HUD home foreclosure.

 Sure, they might have an inferior reputation, but HUD homes (ie., government-owned) also have advantages to the buyer who intends to live in the home. One distinct advantage is that prospective homeowners get first dibs over the investors. HUD homes also offer photo printouts of the foreclosed homes for sale, inspection reports, and an estimate of what it will cost to make repairs to the property. Often the home will have thousands of dollars of free equity after you purchase it.

Buying a home in foreclosure could be the best deal you ever made, especially if you are able and willing to put some “sweat equity” into it. You will be better off if you have already owned a home previously and know the ins and outs of home ownership. You will also be ahead of the game if you enter it with savvy, experienced professionals – real estate agents, brokers, or a real estate attorney. Do your homework, and get ready to find the home you always dreamed of owning, and making it your own.

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