So, You Think You Want To Buy A Foreclosure? Think Again!

Bring a suitcase full of cash! ...Actually, what I really told my client is that I would see if there were some foreclosures that look "somewhat promising" because  FHA mortgages and foreclosures don't always go together. In my local market bank owned foreclosure listings are a little scary, to say the least.  Some are so terribly distressed that even the most experienced home builder looking to buy and flip will often pass these up.

First, they asked about short sales.  I suggested that they eliminate short sales because we have to coordinate a home sale with a home purchase and they won't have the time to wait for a lengthy and shaky short sale transaction.  The home sale is requiring them to pay out of pocket for the difference between what they owe the bank and the fair market value we negotiated.  They have to write a very big check at closing just to unload their current home and move on.  They need more space.  So, they're a little cash strapped now and they will have to go with an FHA mortgage.  The guidelines do not allow for financing for most badly distressed properties.

I met with a another buyer this week who drove an hour just to see a foreclosure which on paper and online appears to be a really great deal.  I told the buyer ahead of time that the pipes had froze and burst, there was extensive water damage, the plumbing needs to be replaced, the entire first floor has been gutted, etc.  Get the picture?  MOLD.  Lots of it! The buyer still wanted to see it.  The house no longer has a kitchen.  There was no kitchen counter to even leave a business card so agents were just dropping their cards on the floor at the front entry.  And, there was a very big pile of cards even though the house had only been on the market for 4 days. Everybody is lured by the thought of getting a really good deal on a foreclosure.

I saw the buyer's reaction.  I knew the buyer was not going to have the expertise to handle this renovation.  I knew the buyer would need a lot of cash.  There is no way a bank will finance this.  In fact, it's probably a demolition project.  The most likely buyer will be a builder with CASH and a very big dumpster who will probably factor in the total cost of the lot, excavation, basement, driveway, septic system and well drilling.  Everything else will probably have to go.

Here's the way I figured it ...the value of the lot + site work = one number.  Subtract the cost to demolish, and this equals what a builder might be willing to pay to rebuild from the basement up. But, only after a profit margin has been factored in too. Cha-ching!  Bring a suitcase full of cash!

Foreclosures are often not for novice home buyers or the casual handyman.  And, certainly not for people who will not have out of pocket CASH to pay upfront for a house and/or the many needed repairs after the closing.  Okay, sometimes these kind of buyers get really lucky.  But, not very often.  In summary, finding a bank owned foreclosure in really good condition and free of FHA red flags is like trying to find a needle in a haystack.