5 Reasons Why You May Not Want to Buy A Foreclosure

Real Estate Broker/Owner with Mint Properties, Lic. #01871795 Lic. #01871795

5 Reasons Why You May Not Want to Buy A Foreclosure

In my area, we are finally seeing a small decrease in the number of foreclosure (REO) properties sold. Given the state of the economy and the ever-present and ever-threatening "shadow inventory," I’m not sure that the number of foreclosures sold is headed downward permanently. However, I do see another interesting trend -- buyers snubbing REOs!  After so many years where buyers felt they had to literally lay down in the middle of the road for the privilege of buying a bank owned property, I am now seeing buyers simply walk away from the foreclosure purchase process, and I must admit it is refreshing to observe.

Here are 5 reasons why you may not want to buy a foreclosure:

1) Mandatory bank pre-qualification. You see this a lot with the big banks: Bank of America, Wells Fargo, and Chase, in particular. For the honor of bidding on their maintenance -deferred, non-performing asset, buyers are expected to fork over all their financial information, take a hit to their credit with an unnecessary inquiry, and hold a straight face while a salaried employee of the bank explains why despite the bank's reportedly poor loan processing timelines, they should switch lenders based on a free appraisal and a flashlight pen.

2) An unfair bidding process. Banks are well known for dragging out the bidding process to their own advantage. After a few spins on the merry go round of “highest and best” many buyers now just want to exit the ride. Their heads spinning, they don’t quite know if they are the only buyer left and if they are now effectively bidding blindly against themselves. After all, the bank is often “countering” offers submitted weeks ago that are often expired anyway.

3) That skewed bank addendum. OK they have finally selected you as the lucky buyer. Now before the bank will sign any contract, they want you to sign and agree to all of their heinous terms. Some examples I’ve seen? They can cancel the deal at any time for any reason. They will not turn on any utilities for inspections. Initial here where it says you’ve had an attorney review this addendum for you, and by the way, you have an hour and half to return the addendum or we will cancel the deal. The buyer must cut the grass every third Wednesday of the escrow period. OK I made that one up -- but nothing would surprise me as the banks are always revising and reworking these atrotciously skewed addenda to their advantage.

4) Limited disclosures. As enticing as it may sound to buy a property and receive no actual information about its defects from the seller, some buyers now balk at the thought. The law exempts REO sellers from certain disclosures in California, and they often take that fact and run with it -- right over a cliff. However, even though banks go to the trouble of reminding you about a bizzilion times that the sale is “as-is,” they sometimes do not understand that "as-is” does not allow a bank to fail to disclose what they actually know.

5) It may not be such a good deal after all. Yes, deferred maintenance and a seller who wants to do absolutely no repairs aren’t so appealing after all. The bank may have picked just the right shade of lipstick for that pig, but I find that buyers are no longer impressed by a coat of flat paint and layer of cheap carpet. As the market decreased rapidly, foreclosures were setting “market value” as they were often the only homes selling. Now that the market has settled a bit, I find that buyers are only interested in REO priced below others comps due to the (now well known) fact that they often hold costly surprises for their new owners.

Tni LeBlanc is an independent Real Estate Broker, Attorney, Short Sale Agent and Certified Distressed Property Expert (CDPE) serving the Santa Maria, Orcutt and Five Cities area of the Central Coast of California. If you are ready for the challenge of today's real estate market and interested in a list of available foreclosures in the Central Coast area, contact her office at (805) 938-9950.

Copyright© 2011 Tni LeBlanc *5 Reasons Why You May Not Want to Buy A Foreclosure*

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Margaret Goss
Baird & Warner Real Estate - Winnetka, IL
Chicago's North Shore & Winnetka Real Estate

Living in an area where foreclosures are not plentfiul, I really was interested in reading your post. 

Maybe if more buyers exit the process the banks might wake up.  Well, not likely, is it?

Nov 13, 2011 06:36 AM #2
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Tni -- spot on!   The allure of bank owned properties has certainly lost some of its lustre due to the reasons you have noted.   Buyers(especially first time homebuyers) in my market are very cautious and the stipulations, restrictions, lack of disclosures, responsibilites that are dismissed and unrealistic time frames established and associated with some bank owned properties is not helping the situation at all.   

Nov 13, 2011 06:37 AM #3
Greg Nino
RE/MAX Compass, formerly RE/MAX WHP - Houston, TX
Houston, Texas


Especially in my mkt. people tend to think that foreclosures are an automatic slam dunk whopping helluva deal. NOT SO, especially when the avg home costs about 150k. You have to consider costs, lot location, neighborhood crap factor and  much, much more.

Nov 13, 2011 06:39 AM #4
Dick Greenberg
New Paradigm Partners LLC - Fort Collins, CO
Northern Colorado Residential Real Estate

Hi Tni - Great points! We're experiencing the same response from many of our buyers here. While they usually start out eager to see REO's, they realities of the deal itself often intrude on the fantasy of a great deal. That said, it's still a walk in the park compared to short sales.

Nov 13, 2011 06:40 AM #5
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Kamal - You know, I find more and more buyers reject the bank pre-qual and the unfair bidding process right off the bat.  For that reason, many will turn to short sales rather than foreclosures.  The trick with short sales is managing the wait.

Margaret - I think the process will get better as there is less demand and more rejectiion of the skewed process.  If they want to sell property, they need buyers.

Michael - Yes, I don't see buyers falling over themselves to buy foreclosures anymore.  Since there are other options, many will walk away from the tough process to buy what is sometimes a troubled property.

Thanks for the suggest Greg! Yes, it's true not every foreclosure is a good deal.  Buyers are becoming more educated about that fact.  Some foreclosures are down right expensive!

Dick - Yes, many people that contact me are initially interested in buying a foreclosure as well.  When they get out there and look and then hear the terms, they get less interested.  LOL.  Foreclosures are difficult up front (getting acceptance), and short sales are difficult down the line (the wait).  The buyers I'm working with now are very sensitive to price, and do not want to endure a bank owned bidding war and a hit to their credit, often they are better suited to waiting on a short sale.


Nov 13, 2011 07:34 AM #6
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

Wouldn't it be fun if every buyer in every city across the U.S. simply refused to consider a REO?

I'd love to see it, and I'd love to sit back and listen to the banks scream.

Nov 13, 2011 07:36 AM #7
Debbie Holmes
Gold Key Real Estate - Boise, ID
Gets the job done!

What you say is true but it is often what the buyer wants. They are often buying on price and not all of these homes have deferred maintenance.  I will take an REO any day over a short sale.   My buyers and I have been burned far worse on short sales then REO property.  Mostly my buyers are happy with their REO's because it allowed them to find a home they could afford.   I just make sure they know the rules we are playing with upfront as we make our bids.....In short sales the rules change from realtor to Realtor and ethics seem to go out the window.


Nov 13, 2011 07:45 AM #8
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Marte - Wouldn't that be sweet?  Better yet, how about people stop depositing money in these institutions that are driving us all crazy right now?  That would be a good start as well.

Debbie - Maybe your area is different.  Most foreclosures in my area have deferred maintenance.  Sorry you've had that experience with short sales.  If a short sale agent acts unethically, they may have trouble getting offers in the future, same goes for REO agents.    The bottom line seems to be that some buyers are tired of being mistreated.  They will go where they have the best opportunities.

Nov 13, 2011 08:04 AM #9
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Tni - After recently helping my daughter purchase a foreclosed lot, I agree that the process is significantly more difficult that it should or could be.

Nov 13, 2011 08:21 AM #10
Barbara Todaro
RE/MAX Executive Realty - Franklin, MA
Marketing Agent for The Todaro Team

Tni....we soooo dislike showing bank owned properties....we just sold one to one of our builders and he furious with the bank information they needed, even though the builders bank had approved him....he's very strong, but they wanted every bit of information about his finances and he wasn't using bank of america....

Nov 13, 2011 08:25 AM #11
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

John - Yes it is quite an obstacle course.  Who wants a credit inquiry for one property that you may not get?   It better be a great deal.  LOL.

Barbara - It is frustrating especially when you have an overqualified buyer.  They really don't understand why they have to endure it -- and some just flat out refuse.


Nov 13, 2011 08:51 AM #12
Peggy Chirico
Prudential CT Realty - Manchester, CT
REALTOR® 860-748-8900, Hartford & Tolland County Real Estate

Hi Tni - I especially agree with you on the cost of deferred maintenance.  Here in the Northeast, that can mean burst pipes in the walls because the system wasn't drained before winter set in.  Big expense to replace the pipes and furnace as well as the water damage.

Nov 13, 2011 09:43 AM #13
John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service
Tni - Thank you for sharing detailed quality information on five reasons why you may not to buy a foreclosure.
Nov 13, 2011 11:01 AM #14
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Peggy - Yes, a neglected home can be very costly.  Especially once bad weather sets in.

Thanks for stopping by John!

Nov 13, 2011 12:00 PM #15
Laurie Clark CRB Angel Realty LLC Your Monument Realtor 719-502-6572
CRB-CCSS-ASD-HBS-RSD-Denver Short Sale Agents - Monument, CO
Angel Realty, LLC

Great article. REO's are always so much fun for the buyer, especially with HUD actually disclosing! Thanks for posting this. It just goes to show that short sales, foreclosures and even HUD are better at property disclosure than the major ( tax payer bailed out) banks.

Nov 13, 2011 01:59 PM #16
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Tni - With so much of the market down here in Los Angeles & Ventura counties being distressed (REO/short sales), my borrowers don't really have much choice.  While many of my borrowers have already been snubbing their noses to short sales for quite awhile, they literally can not pass up REOs now too because then they would have little to look at.

With the REOs though, my borrowers are extremely thorough and diligent about the properties they choose to offer on and how far they will play the bidding wars.  They know exactly how much they will have to spend after the COE to take care of the deferred maintenance and necessary changes.  They make their best and highest and if that's not good enough then they move on.  NEXT!!! 

Nov 13, 2011 02:11 PM #17
Christine Smith
Buyers Brokers Only LLC - www.BuyersBrokersOnly.com - Canton, MA
Exclusive Buyer Agent & Attorney, Canton, MA

Tni....You nailed this.  You have been on a roll the past couple of days....good to see you back!

Nov 13, 2011 02:21 PM #18
Katerina Gasset
Get It Done For Me Virtual Services - Wellington, FL
Get It Done For Me Virtual Services

Another informative post from expert Santa Maria Short Sale Agents, Tni Le Blanc. I definitely agree with you Tni. Every point you have discussed here about foreclosure is very true. Thanks for sharing.

Nov 15, 2011 04:57 AM #19
Liz Lockhart
Riverbend Realty, Cape Girardeau, MO - Cape Girardeau, MO
GRI, Cape Girardeau Real Estate

Tni~ Short sales and REO have their own challenges, no doubt. REO deals, as with short sales, are not all equally difficult. Bank of America, for instance, is very difficult on the REO side, while being quite organized on the short sale side.

Some REO sellers are quite reasonable, and others are very demanding (can you spell HUD)? Like BofA, HUD is maddeningly demanding in some ways and forth-coming in other ways. While most provide no disclosures, HUD provides disclosures and even provides their appraisal to contracted buyers.

Not all REO sellers require a pre-qual from a specified institution. Fannie Mae and HUD do not, for instance.

In REO land, once the buyer has a signed contract, the seller is not going to come back weeks or months later and try to renegotiate terms of the sale.

The crucial point is that buyers  and sellers need qualified representation in these deals. The most satisfactory outcomes are the ones where the real estate agent is experienced in the specific kind of transaction taking place. That's why any short sale buyer or seller in your area should come to you...And REO buyers and sellers in my area should come to ME.  ;-) 

Nov 28, 2011 07:41 AM #20
Bas Panch
SCV Home Buyer - Valencia, CA

Hi Tni,

As always, another excellent post. I really admire your writing skills and practical, no-nonsense way of looking at things. Keep up the good work as a top Santa Maria short sale agent!

Jul 05, 2012 12:44 PM #21
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Tni LeBlanc, Realtor®, J.D.

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