If you are thinking about buying a new home, some of the most attractive properties and prices that you come across in your internet searches will be property that has been reposessed by the lender. Foreclosed homes come in all sorts and sizes, and they carry risks and rewards that all homebuyers should understand when house hunting.
Here is my list of a dozen things that make foreclosed property different from homes currently owned by real people. While I feel that all are important, while actually touring homes, none will come close to the immediate impact of not remembering number twelve.
Foreclosures
1. Vacant. They will often have utilities turned off and/or be unheated. Snow will seldom be removed from walks or driveways. Dress accordingly.
2. Appliances and other personal property may be present when we view the property. What is there will probably be there when you possess the property. It is usually not owned by the bank, and therefore, it cannot be sold by the bank.
3. Earnest money is usually a specific minimum, sometimes as much as 3% or more. It is usually non-refundable after the inspection period ends. If you fail to obtain financing for any reason, the earnest money is forfeited to the bank. Banks often insist on a cashier’s check for earnest money.
4. Qualification by the bank’s designated lender is often required. You do not need to use their lender, but they may still require that their lender verify your eligibility.
5. Response time can be as long as two weeks or more. Their response almost always is in the form of a counter offer, even if they accept the offer you made. They will include an addendum which will remove some of the safeguards we normally include in the standard MN Association of REALTORS® approved purchase agreement. They will also insist on a specific closing date which may be earlier than the one we have requested. They will charge a per diem, usually $100 per day, if the closing is delayed for any reason other than their own lack of performance. They may delay returning to us a fully executed and signed agreement which is needed to complete the application and final approval of your loan.
6. They will usually insist that we use the title company that they mandate. Legally, they cannot require this.
7. All foreclosure sales are “As is” sales. A thorough inspection by a qualified home inspector is even more important than in a “normal” sale.
8. Inspections can have additional expense. Often, the home is winterized, and the cost to de-winterize and re-winterize must be paid by the buyer at the time of inspection. Typically, the bank’s designated contractor will do the de/re-winterization, and payment will be made on site at the time of the service.
9. There are many things completely out of your or my control in a foreclosure transaction. Seller can delay closing with no warning, and there is no recourse for the seller’s delay. Seller’s delay could result in the expiration of a rate lock or other financing commitments. The bank does not care.
10. There may be unusual or highly risky terms demanded by some banks. Sometimes a low price and an attractive property are not enough to offset the seller’s terms.
11. Seller will convey title to you through a limited warranty deed, rather than the more common general warranty deed. Owner’s title insurance is strongly recommended. We can sometimes get the bank to pay the cost.
General Warranty Deed A deed which conveys not only all the grantor's interests in and title to the property to the grantee, but also warrants that if the title is defective or has a "cloud" on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic's liens against it) the grantee may hold the grantor liable.
Limited (or Special) Warranty Deed A deed in which the grantor conveys title to the grantee and agrees to protect the grantee against title defects or claims asserted by the grantor and those persons whose right to assert a claim against the title arose during the period the grantor held title to the property. In a special warranty deed the grantor guarantees to the grantee that he has done nothing during the time he held title to the property which has, or which might in the future, impair the grantee's title.
12. If there is a refrigerator on the property, it’s usually not a good idea to open it.
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