Q: There are a lot of foreclosures out there with really attractive prices. What do I need to know before looking at foreclosed homes?
A: Foreclosed homes can be a great buy – the banks that own them are often willing to part with them at a discounted price, and they can be a terrific purchase for typical home buyers and investors alike. However, foreclosures come with their own set of risks, and the purchase process can be difficult when the buyer is obtaining a mortgage. Make sure you are prepared and know what to expect, and you could get a great deal on your next home.
One of the main pitfalls of foreclosed properties is often the condition. We frequently see the previous owners leave the home in poor condition, and occasionally there is major damage, either from the owners themselves or the deterioration of the home over time or due to the elements. Aside from needing cosmetic repairs like paint and flooring, foreclosed homes can have hidden defects that may not be easily apparent, like broken pipes or environmental hazards. The banks that own these properties typically do not perform any repairs, and they don’t make any claims regarding the condition. So the sale is often “as is, where is” – what you see is what you get, and buy at your own risk. I always recommend that my clients have inspections done on any purchase, and a foreclosure is no different. Just because a bank will not perform repairs doesn’t mean you can’t have your own inspectors check everything out ahead of time for you.
These foreclosed homes are usually priced according to their condition, so a home that needs a lot of work will typically be priced lower. However, buyers still have to consider whether they are going to be applying for a mortgage for their purchase, and whether the home they select fits their loan type. A foreclosure that needs some repairs may not work if the buyer will be getting an FHA, VA, or USDA loan, which are popular mortgage programs, especially for first-time buyers, that require the home to be in good condition. There are loans out there that allow for a home to be in poorer condition, and even loans that allow a buyer to borrow extra money to complete renovations on the home after closing, so talk to your Realtor and lender about your options if you fall in love with a foreclosure that needs some TLC.
When considering the purchase of a foreclosure, buyers should also be a little flexible with their terms and time frames. Foreclosure banks will often require the buyer to pay all of the transfer and recordation taxes on a purchase, whereas we usually see the buyer and seller split these charges in a traditional purchase. Banks often take several days to respond to offers and requests of any kind, so be patient and understand that decisions have to go through a process before they can be answered. And, although you are expected to be patient on your end, you should strive to meet all of your deadlines because banks often charge “per diem,” which means they may charge the buyer for each day the process is delayed.
Purchasing a foreclosure can be a great opportunity, and you can really get an awesome deal on your next home. But make sure you are educated, and have a Realtor and lender on your side who understand the process and are as committed as you are. Be sure to have all elements of the property inspected, and know what you’re getting into. The risks are worth it when you are able to get a great price and make that home yours. Good luck!