Depending on the price range of buyer that I work, with, I almost always get the question during our hunting, “What about Foreclosures?”
Usually in the price ranges below 200K, we see a large amount of bank owned properties in foreclosure or accepting a short sale (when the bank will take less for the property than what they have lent out on it). Foreclosures are perfect for certain people but I will stand behind the statement that they are not a good idea for first time buyers, or for people who intend to use the home for their primary residence. That being said, there are a small amount of buyers out there that do have success in this foreclosure market.
Ohio has lead the country in foreclosed properties for several years. This shows us that at one point, banks in this area were more liberal in lending monies to people who were getting 100% loans, who perhaps should not have purchased a home at the height of their price point, and thus, have failed to make payments on time, defaulting on their loans and the bank taking the house back from them. I have toured a foreclosed property after the people living there were evicted, and I can assure you they were not happy they were kicked out. So much so that you sometimes don’t want to enter due to stench or filth. Many times, they are in the process of trashing the house, to get back at the bank, and you don’t want to buy that house for your family.
Typically if the owners could not make their mortgage payments, they might not have also been taking care of the general maintenance of the house. Almost always, you find that the house has been neglected due to lack of money to care for it. Sometimes it is small things like lawn care, but sometimes, it is a leaky sink, that leaks for months, causing the cabinet to rot out, and leak into the drywall of the floor below, now having concern for mold problems, drywall needing to be replaced etc.
In a foreclosure, since the people weren’t paying their mortgage payments, there may have been other bills or repairs that have not paid either. When creditors are not paid by their customer, they can put a lien on the real estate they own. This lien will have to be paid before you the buyer can purchase the real estate. So, if you buy a foreclosure you may also be responsible to pay off several thousand dollars in liens for the previous owner, before you can title the property in your name. There are methods of negotiating with lien holders for a reduced payoff, but you will always pay more than half of their lien debt prior to closing on the home. Investors are used to this type of situation and they pay the liens with cash and move on with their purchase.
Inspections are KEY in homes like these, if you intend to put your family into them. Remember, if this is the largest purchase you will make, then you must do your due diligence and have an inspection, to protect your families’ interests. The problem with inspections is that in the process of negotiating with the bank, they will rarely give you the time you need to get an inspection to know what you are buying. Nor do they ever agree to repair or replace anything that was not maintained or broken by the previous owners. They take a completely hands off approach with regards to inspections and repairs. Most will just sell the property as is and not even look at the results of an inspection. This will take the wind out of your sales if you were hoping to have a smooth and pleasant home buying experience. A foreclosure property will often have several other buyers or “investors” interested in this same property, who have cash and will buy the house with no inspections.
These investors have the upper hand, as they have cash to purchase the property, which allows them to close on the house in a week’s time. If you are getting a loan, then that process is likely to take 30 days to complete. The banks will take less for the home, if they can sell to a cash buyer with no inspections. And they do, almost every time.
When we have a short sale situation, and you want to put in an offer on a house, you go through a long waiting period. The house goes on the market, you write an offer and submit it, (some times, the bank requires a larger than normal earnest money or down payment that most buyers in this price range do not have) and depending on the bank, it takes 14-45 days to get a response from the back as to if they will take your offer or not or if they will begin to make a counter offer. In the meantime, cash offers will come in and will go to the top of the stack of offers at the bank in those 14-45 days. If you severely under bid for the house, then someone can outbid you during these 14-45 days. All while this is going on, you are prohibited from writing an offer on another property while you have an offer in on this one. You will have no idea when you will get a response or what that response will be. So, you might have just wasted 45 days, and missed finding that house that is perfect for your family and you could have already moved in by now. This method of buying a home may save you some money, or it may end up costing you more money in unknown defects and their repairs and frustration in the end.
In some states in the US, you can get all the way through this process and actually close on the house, and the original owner can come up with their deficient monies and get the house back! That means you lose the property you have been working for months to obtain, just because the previous owners raised the money necessary to take back their home. When this happens, you loose considerable amounts of money, especially if you have already begun to renovate the home, now for the old owners!
Foreclosures are a great idea when you have about 100K in cash to invest in a piece of real estate. These types of investments are still risky if you don’t have an inspection, and know what you are buying. Foreclosures are great if you have time to repair and discover the inadequacies of the home, they are not generally move in condition. If you are a handy man or are very knowledgeable about the construction and or renovation process foreclosures are great. If you have investors along side you in the property, it reduces your risk, and most investors team up or have a few partners to reduce risk. Foreclosures carry a lot of risk, and if you can bite through the risk, there is sometimes a large reward, other times, it is a break even or when more problems than expected come up, they are upside down in the investment. To me, foreclosures are best for investors, not families. If you are still interested in purchasing a foreclosure property, I can recommend you to a Realtor that focuses his business in the foreclosure market.
If you want to be excited and have a great experience finding your dream home, I don’t recommend going the foreclosure route. I can promise you will have a wonderful experience buying a home the traditional route that 99% of people take when purchasing their primary residence with me! I hope I am your #1 choice to represent you as your Residential Realtor!
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