Is Buying a Foreclosed Property Realistic?
My wife and I enjoy our apartment, but we’re preparing for the day when we can make the jump to a house. We could use the extra space, and we’re ready to get away from some of the ticky-tack regulations and rules that landlords love to use.
Financially, however, our preparation is lacking. It isn’t because we’re not trying, but we’ve decided that we’d like to have a sizable down payment and know exactly what we’re getting into. We haven’t had much debt in our marriage so far, and so in some ways, we’re reluctant to dive in.
For this reason, buying a foreclosed home is something that has been very interesting to us. I was first sucked in by hearing radio commercials announcing homes for sale for just $12,000 or $22,000. I naïvely thought, “wow – $12,000? We can swing that. We’ll be in a house in no time!”
Turns out, such was not the case. While properties going for those prices are available, most foreclosed homes can be found going for between 20-40% off the value of the home, according to AOL Money. While this isn’t rock bottom, it’s still quite a bit more affordable than a full-priced home.
According to the same AOL Money article, there are five tips that can make buying a foreclosure a realistic choice for many potential home buyers.
1. Find a property. The article recommends checking two sites: Foreclosure.com and RealtyTrac. Both charge a fee, but they each list thousands of properties. The best places to look are areas that are places that have a high grouping of “distressed properties.” Doing a bit of research about the local economic situation can help as well – you’ll obviously have better luck in areas with more foreclosures.
2. Skip the auctions. At an auction you’re usually buying a home without seeing it first. Before you make any serious offers on a property you’ll want a full inspection, and that’s hard to do with properties that are auctioned off by a court. You may also be responsible for back taxes on the property, something that might not be disclosed during the action. The best thing to do is to wait for the bank to put the home back on the market. They’ll usually pay off any taxes or debts, and fix the home up a bit to attract potential buyers. This is a much safer way to buy.
3. Know local home values. As the article states: “Just because a home is being sold b the bank, doesn’t necessarily mean it’s a bargain.” If you find a property your interested in, use a site like zillow.com to compare values of the homes around it to make sure that you’re not getting ripped off.
4. Get Financed Before You Shop. Apparently many banks won’t make a loan for you to buy a ‘distressed property,’ so it’s a good idea to get pre-approved for a mortgage before you start seriously shopping for home. Other banks base their loan on the condition of the property, so to avoid any problems, get your financing set up first.
5. Get an Inspection. I’ve already mentioned this earlier, but an inspection is key. You want to know as much as possible about a house, and paying for a professional inspection is worth it. Homes in foreclosure can be hiding serious problems, since the previous owner probably didn’t have money to make major repairs, or even perform routine maintenance.
With an inspection you’ll know not only the condition of the home, but what kind of repairs are needed and how much you can expect to pay for them.
While we’re still a while from seriously shopping for a home, we’re planning on checking out foreclosures for sure. Any money we can save on a home would be a leg up financially, and put us that much closer to being debt free again.
What thoughts or experiences do you have with buying a foreclosed property?
Article comments
@Max: Consult a real estate attorney and a CPA who specialize in real estate issues.
Great stuff,
I just have one question. I am bidding on houses of 1.5- 2 million and am offering +- 500k to 600k. Lets say one bank accepts…What happens with the property taxes. I read somewhere that you inherit the previous owners tax amount the first year. Is this true ot not? Only read it in one place. The houses are in Coral gables florida. I know you can challenge the apraised value but my question is specifically about the first year. Can you challenge the first years asessment? Some of these houses have $40.000 tax bills which is far above my budget. I can’t pay more than 12 to 15k a year. Am I in danger?
Thank you
MVG
I’m in the process of purchasing a foreclosure right now and am closing in the next week.
In my price range of just above $100,000, most of the houses I ended up looking at were foreclosures and for the most part, they were listed in our local MLS listings.
Some of the foreclosures we looked at had major repairs needed and were empty for a year or longer, others still had people living in them, so there are all types of circumstances that can occur.
The worst part is that each bank-owned property for sale is subject to the specific selling terms of that bank, like they may request you receive preapproval from a specific lender, or you could have to put down a deposit just to make an offer on a house, or you could have to give them a 60-day waiting period to return a decision on your offer.
We bid $99,000 on one house, which was the asking price, and after the 30-day waiting period, the bank never even bother to respond to our offer.
That turned out to be a good thing for us though, as we really got lucky with a good foreclosure in great shape at a low price.
It was valued at about $145,000, and we’re paying less than $110,000, for a place in a good neighborhood with no major damages.
We got lucky though, as many foreclosures aren’t as nice and it’s not always so easy to close the deal, although we’ve gone through a lot along the way.
So buying a foreclosure turned out to be a great deal for us, and it can be for anyone, you just need to be careful along the way.
Re: Inspections and Utilities
If the utilities are shut off in the foreclosure, always turn them back on for the inspection if the city or inspector does not require it. You will pay a fee, but potential issues uncovered will make it worth it.
We just bought a foreclosure for market value. Depending on your local market, foreclosures in good condition (ours only had minor issues) may be subject to a bidding war, so the discount isn’t as great. If it’s trashed or needs a lot of upgrades, you can get a good deal.
Also depending on your local market, the utilities may be on. In Los Angeles, listing agents are required to keep water/power on and not let the yard get too overgrown (although ours is dead, so apparently that’s okay). He had the gas turned on for the inspection.
We put 20% down and had a conventional mortgage. You should be pre-approved from a bank, not a broker. Banks like to see approvals from other banks because they know it’s more likely to close. You should also avoid FHA, because they take longer to close and banks will often choose the non-FHA offer in a multiple offer situation.
re: Inspectors
Check the terms of agreement with your home inspector. If they are reputable professionals, they will stipulate what they will and will not inspect (e.g. the sewage pipe from my house to the sewer main was defective, but the inspection specifically did not cover that). If it was not stipulated, they should have inspected…what is the point in hiring a professional if they do not get it right (or at least take responsibility when they miss)?
You do not have to take them to court, but you should see if they will cover (at least in some part) the cost of repair.
Also, keep in mind that if a property has been vacant with the utilities off, the inspector will not be able to determine if the electrical, gas, water/sewer systems are working properly because they’re not working. So it’s still a bit of a gamble. I’ve heard that maybe you can get utilities turned on for an inspection, which would be worth paying for, but we looked at a property that didn’t even have an electric meter (one had been there, but it had been removed).
Also, I realize the article is about foreclosures, but short-sales are also abundant these days. However, I don’t know if it’s the same with foreclosures, but short-sales take a LOT longer to go from offer to acceptance to closing. Not something to do if you’re needing to move in on a tight schedule.
For me, this in many ways is even worse than standard debt. To make a mortgage payment, I need merely earn my paycheck and send in a payment.. To resolve the repairs in the home I have, I must either learn how to fix things myself or make arrangements to contract out that work and all the associated time that goes along with that.
Your home is not resellable at top dollar until the maintenance is done. Until the maintenance is done, you have to live with a substandard house.
White Wave is 100% right. You do need to account for repairs and keep enough cash available after the purchase to cover such things.
A few things that entered into our consideration when deciding to buy this home that needs repairs.
* I’m fairly handy. I can run basic electric, do basic construction and simple plumbing (replacing, re-routing, etc.). I also don’t mind reading the building codes, and I’m a quick learner. So, we’ll save as I do repairs and fix things myself.
* All of our MAJOR repairs are in parts of the house that we can afford to wait to repair them. They are either outside (rotting soffits) or in the basement (mold galore). The main floor was usable, it just needed a good cleaning to move in. We ripped out the mold in the basement but will wait till we have saved up enough money to remodel it nicely. If it were the main bathroom or kitchen that needed that much work, we couldn’t handle waiting.
I bought a foreclosure in Jan ’08 and had pretty much the same experience as MichaelM.
Here are my thoughts and experiences:
1) Found our foreclosure through our realtor, they were listed on the local Coldwell Banker website. They are identifiable by the “Sold As-Is, Seller to do no repairs” in the description. Most foreclosures are not trashed, but they are dirty (takes a long time for a house to get back on the market and they sit vacant with all utilities shut off). You can get a great deal on the trashed ones, but you’ll be doing renovations. You can get a good deal on a walk-away which most were in our area. Our walk-away was very dirty, we cleaned for days and painted every weekend for a long time. We also had to replace the carpets.
2) I have no experiences with auctions, but the properties I saw “on the block” weren’t that great.
3) Your realtor can give you an idea of the “actual value” of house as can an appraiser (most mortgage companies require an appraisal). Zillow also helps. I also used the County Records to see how much houses in the neighborhood sold for in the past.
4) Our mortgage company had no issue with it being a foreclosure. All they were concerned with was the down payment, credit, and income.
5) You need, need, NEED an inspection! If the house isn’t trashed, there is always the possibility of sabotage. By this i mean stuffing a rag far down a drain, cutting pipes, crossing wires, clogging pipes, etc. They will miss something, although it might not be their fault. We had horrible, horrible mold under our dishwasher. He missed it because the washer only leaked when it was running, and the mold was dormant and dried out from 18 months of shut-off water. It came back full force after we moved in. We did have insurance to cover mold and water damage though, luckily.
Anyway, I highly, but cautiously recommend buying a foreclosure. We bought ours for $169K, and it could potentially be sold for $190+K.
I have purchased a foreclosed home. I am assuming that if you are looking at the 20-40% off, then you are looking at homes with damage or at least deferred maintenance.
While the price tag may get you looking, keep in mind that you will end up footing the bill to fix any problems that the property has. This is a huge liability, one that you are committing to by buying a home that needs repair.
For me, this in many ways is even worse than standard debt. To make a mortgage payment, I need merely earn my paycheck and send in a payment.. To resolve the repairs in the home I have, I must either learn how to fix things myself or make arrangements to contract out that work and all the associated time that goes along with that.
Your home is not resellable at top dollar until the maintenance is done. Until the maintenance is done, you have to live with a substandard house.
If I eventually do need to relocate, then I will not be considering a home that has not been fully cared for.
I have done what you are considering and regret it.
Hi Jeff,
My wife and I just bought a foreclosure. We were sick to death of apartments, and when we moved, we decided we were going to buy.
We weren’t specifically looking for a foreclosure, but 99% of homes in our price range in the neighborhoods we wanted to live in was a foreclosure. In the end we paid $100k for a house that sold for $250k 4 years ago. We’re going to need to put in about $20k of work to get it where we want it (moldy basement needs replacing, needs a new furnace and AC, some cosmetic work).
We used a realtor, got a conventional 30 year mortgage with 10% down and had a home inspection. It was a relatively smooth process. Here’s how our experience differed from the article…
1) If you’re not specifically looking for a foreclosure, just use a regular real estate website. Most foreclosures get listed in the MLS system. Filtering by price is available on any decent company’s website, and you’ll very quickly figure out how to see which homes are foreclosures. (Tip: Many of the listings don’t say ‘foreclosure’ in them, and may use old photos from a previous sale to give the impression they are still furnished / not trashed)
2) Auctions : You’ll need cash in hand for anything under $150k. Lots of auctions in our area were also listed in MLS, so any realator could bring you to see them beforehand.
4) Financed : The mortgage places I spoke with would not finance us unless we had a specific property they could evaluate for the underwriting.
Also, FHA won’t give a loan on a property that isn’t inhabitable (no furnace, or not up to code, etc.). Banks won’t do repairs on properties. If you’re looking for a FHA loan, about 3/4 of foreclosures won’t fit your needs.
Since our furnace doesn’t work, we wouldn’t have qualified for a FHA loan. We got a conventional mortgage through Wells Fargo once we had picked the place we wanted. We put 10% down. Other than they being super slow, there were no hitches.
5) The inspector caught a couple of big things (mainly the furnace) that I wouldn’t have had a way to determine how good or bad they were. He also missed a huge leak in the tub faucets that means we’re going to have to re-drywall and tile one of the bathroom walls. So, get an inspection, but assume that they missed something.
Other: Bring a good flashlight if you’re going to see a foreclosure. Many times bulbs are burned out, electricity is turned off, etc. Also, bring some hand sanitizer — those houses get really gross.