Buying Foreclosures: Are They Bargains or Headaches?

Buying Foreclosures: Are They Bargains or Headaches?

A perception many buyers have is that foreclosures are a better deal than regular sales.
While this may be true in some cases, I’ve found that in the long run they are not that much of a bargain.

Don’t get me wrong, there are bargains (by that, I mean houses that will have instant equity) out there in foreclosures. But I think you have to look harder and longer for them than you would if you bought non-foreclosures, and then you have to move fast to get your offer accepted because the competition is pretty fierce.

In almost every case, a foreclosure is going to need some work. The previous owners were in financial distress and may not have had the money to perform general and routine maintenance on the house for months before it went to foreclosure. The house could have sat vacant for months after the owners moved out. Empty houses are susceptible to break-ins, mold and damage from storms.

Often, when banks take over ownership, they remove all possessions from the previous owners left in the home—clothes, food, furniture, etc.—to make the home as empty as possible. And they may turn off the water supply, drain the pipes and shut off water valves inside to prevent any pipes from bursting in the winter.

But they usually do not make any repairs to the house, and they usually sell the house “as is,” neither providing any disclosures as to the condition of the property nor showing any willingness to provide any financial credits to help the buyers make any repairs. (This is different from regular sales, in which case the sellers may agree to make a repair for a defect found during the buyer’s inspection, or offer a subsidy that helps in the repair cost.)

But I’ve seen some foreclosures in which banks will made repairs. One lender had a four-year-old townhouse on the market and was telling buyers that it was planning on replacing a stained carpet that was damaged from a burst water pipe.

In those situations, you can expect that the price of the home will reflect the market price. For houses that need more work, the price may appear to be lower than those for similar houses that have sold near by. But after accounting for the repairs, the houses’ true cost will be close to the market price.
 
If you can make repairs inexpensively, then you may find a house a bit below market price, and after you’ve made the repairs, you could have some built-in equity.

Of course, not every foreclosure is priced this way. Sometimes an asset manager and the bank’s real estate agent will decide to put a very attractive price on a house because they need to sell it quickly. Or the bank is willing to drop the asking price considerably if you make a low-ball offer.

However, if you, the owner-occupant, can find these foreclosures, an investor can, too.  And an investor has cash. If an asset manager at a bank is looking at an offer from you that is for the same price as an investor’s offer, and your offer is contingent upon getting financing and you need 30 to 45 days to close, and the investor’s offer is for cash and will take 14 days to close, which offer do you think the asset manager is going to prefer?

Speaking of financing, what type of mortgage are you qualified for? There’s conventional, which generally requires a 20 percent down payment, and there’s FHA, which allows a 3.5 percent down payment. Many of my buyers use FHA funding, but FHA takes a close look at the inspector’s report before it agrees to provide a loan on a property. For example, if there are exposed electrical wires, if a countertop is missing or if a major system, such as the air conditioning, doesn’t work, FHA will turn down the loan. Because of their condition, many foreclosures will not qualify for FHA mortgages.

There is a mortgage program offered by Fannie Mae that gets around this problem with FHA financing. The Homepath Mortgage program has two prongs: one allows the owner to finance the needed repairs and the other provides a mortgage without funding those repairs. Both prongs waive a need for an appraisal, saving the buyer as much as $400. The loans are not contingent upon the findings in the inspector’s report. Down payments can be as low as 3.5 percent.

Some buyers are very happy with their purchase of a foreclosure. They believe they got a great deal, and the repairs they had to make were minimal. But buyers should be aware that buying a foreclosure will probably not be without its frustrations, and it may not be the bargain they had hoped for. When considering purchasing a foreclosure, they should be educated about what obstacles lie ahead, but which can be overcome with the proper guidance. Looking for that great deal,visit my website at www.ChrisThomasHouses.com