Real Estate Q & A: Foreclosures?

Real Estate Agent with Sotheby's International Realty
I was asked a question about foreclosures. Here is my take on them:

Question: Are Foreclosures a good deal?

Answer: They can be great deals for experienced investors. For most people who are looking for a first home to live in or a 2nd property for income, the considerations are different because the goal and intent is different from, say an investor, who already has 20 homes and is able to spread the risk of one bad purchase across a larger portfolio of real estate assets.

Whenever you purchase a home, watch out for situations where you are not able to exercise all of your rights to conduct a thorough investigation of the home. This includes having the home appraised, title reviewed, home inspected, and the review of the many disclosures that will help you understand the property that you are purchasing.

Homes that are sold at auction or sold in bulk - can be in pretty bad shape...they might have been stripped of some really important components - such as homes with copper - or have had purposeful damage to the property - or through neglect have other issues that are latent and not visible to the naked eye.

The route that would more likely cost the buyer more upfront but save money and provide peace of mind in the long run comes with all the assurances of a regular house purchase (meaning transactions conducted with a seller who is not in distress) is to buy a home just as it is about to go into foreclosure - or after it has been taken back by the bank.

There are three categories of homes that I strongly urge clients consider before going the auction route. (1) "Pre-short sales" are situations where the home is on the NOD list - a Notice of Default. This means the seller is behind on payment and the bank is putting the seller on notice. Since the seller is so behind on payments, it is extremely unlikely they will be able to catch up and thus they now really need to sell their home. (2) Homes that are approved for a "short sale" meaning the bank has agreed to allow the seller to sell the home at some number and that price is below what the seller owes on the entire mortgage. (3) There is also a category of homes that have completely gone thru the Foreclosure process and the bank has taken the home into its inventory of assets and now needs to sell it...known as an REO for Real Estate Owned property.

There is a fourth category of homes that is often overlooked when buyers are considering a good deal and these are homes bought by people before the incredible rise in prices of this decade. These homeowners most likely bought their home for 1/2 to 1/3 the price they are worth now so they have less of a financial burden and are much more flexible in pricing than people who need to sell now when they bought the home just several years ago. These are the best homes to buy! The sellers are more likely to give credits for repairs and the transaction typically close as planned.

The types of homes I deal with to help my clients minimize risk and maximize protection from a bad decision usually fall into the above four categories. Buyers want to be able to buy knowing everything about the house, that means a home inspection and various other inspections that might arise based on the home inspection, getting an appraisal to make sure the house price checks out, and finally reserve the possibility of changing your mind and getting your 3% deposit back as long there is no breach of contract. These are all rights and options buyers will want to take advantage of to protect themselves given the challenging market conditions.

If you have a question, please do not hesitate to send it to me.

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