8 Tips For Buying A Home In Foreclosure

Written by Jane Genova. Posted in Personal Finance

Buying a foreclosure can mean owning a house and perhaps even in a neighborhood which people never dreamed they could afford.  For those thinking along those lines, the good news is despite the improving economy; new foreclosures keep coming on the market. In October of 2012, reports RealtyTrac, the number of foreclosures had risen to 1,558,543, which was higher than the rate of the previous summer. However, the process of searching for and purchasing foreclosures differs significantly from procedures in traditional residential real estate transactions.  Here are eight tips for buying a home in foreclosure.

Go The Agent, Financial Institution Route

The media portrays public auctions in which buyers get houses for peanuts. However, most of those participating in those auctions are sophisticated professional real estate investors. They have the knowledge and experience to bid for properties. In general, those new to the foreclosure market are better off working with an agent.

In addition, given the complexities associated with foreclosed property, it is wise to buy from the financial institution, that can carry on a “RBO” or real-estate owned purchase.  Some buyers assume they can get a better, faster deal by going to the owner of a distressed property before it enters foreclosure. It is safer and easier to leave responsibility to the financial institution for searching for and taking care of obligations, such as back taxes and documents such as titles.

Understand The Agent’s Role

Unlike traditional real estate transactions, in foreclosures there is only one agent, not two who represent the seller and buyer. That agent represents the financial institution, not the buyer. Neither the agent nor the institutional owner will be offering the usual helpful relationship expected in a sales transaction. Expect everything to be impersonal and completely on the seller’s schedule, not the buyer’s. This is all business and a cold one at that.

Get Pre-Qualified 

Names of agents representing financial institutions are provided with listings of foreclosures. They will likely to demand pre-qualification for a mortgage before they work with a prospective buyer. That must be done with a financial institution which is different from the one which owns the foreclosed property.

Hustle 

The foreclosure market is competitive and fast moving. Even those new to the game learn to scout neighborhoods and listen to word of mouth about what properties might be foreclosed or just have been.  Before they are entered into the database, buyers can go to the institutional owner, bypassing the agent, and make an offer. There will be little or no room for negotiation. Institutions have already taken a hit on the property and have determined what they intend to salvage in terms of money. Therefore, lowball offers are usually a waste of time.

Be Aware Of What “As Is” Means 

All foreclosure properties are sold “as is” so buyers beware. That means that once the purchase is made, the seller has no liability for anything that might be wrong with it or that could go wrong with it. Therefore, the contract spelling out the “as is” status will be many pages long. It’s very important to read this document.

Snoop Around, Invest In A Comprehensive Inspection

In conventional real estate sales, there is a legally required disclosure process. That is not the situation in foreclosures. That is why buyers must pull out all stops finding out, informally and formally, everything they can about the history of the property, including its quirks and the neighborhood.

Potential buyers might be able to track down an existing house inspection report. Often that was done when the home owners were trying to sell before foreclosure, but the deal did not close. The inspection that was done will provide a snapshot of the property before the foreclosure proceedings took place. Many times, once owners know they will be evicted, they often begin destroying the property and carting away whatever, ranging from appliances to copper plumbing.

Those familiar with that particular house and the neighborhood also are informal sources of information. For example, a murder or suicide might have happened in the house which could make resale or rental difficult. You can also find out if the people next door might be public nuisances or if the neighborhood has had a recent run of crime.

On a formal basis, the house inspection has to be thorough and conducted by the best in the business. If the inspection turns up more problems than one is prepared to handle, walk away.  The “sunk cost” of investing in a home inspection should not deter one from saying “no” to a disaster that would require a relative fortune to repair.

Have Funds For Repairs Factored Into The Monthly Budget 

The low selling cost could be offset by the amount of money which might have to be plowed into repairs. The mortgage covers only one kind of monthly payment, so funding must also be available for the contract work. Ask two questions: where is the money coming from and can I afford the additional debt?

Be Prepared To Hold Onto The Property

Real estate investors are adept at buying the kind of property which can be “flipped” or sold quickly, for a profit and they understand the variables to take into account.  However, in the current distressed market, most buyers should anticipate having to hold onto the property until the market returns to that location, if it ever does.  There is no guarantee that a particular property will appreciate in value or that any specific neighborhood will bounce back.  There are neighborhoods in blighted urban areas which have never recovered their value after the housing market collapsed.

Purchasing a house represents a major financial commitment. With a foreclosure, the price tag may be relatively low but the repair costs could be staggering.  Also there are other expenses which go along with home ownership, such as insurance and property taxes, so keep these in mind when contemplating your purchase.

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Jane Genova

Jane Genova

Jane Genova is a journalist, syndicated blogger, and ghostwriter on financial topics. Her analysis and commentary, under her own byline, have been published in The Wall Street Journal, Wall Street Job Report, Selling To Seniors, IP Watchdog and Motley Fool. She has been quoted in Bloomberg Business Week, The New York Times, Plain Dealer, New York Magazine, and Crain's. Currently, she operates her own boutique Genova Writing, Coaching, and More which provides ghostwriting services on financial issues for professional services firms and entrepreneurs. Under clients’ bylines, her publication credits include The Wall Street Journal, Fox Business, Seeking Alpha, American Banker, Bankruptcy Strategist, Yahoo!, The Washington Post, The New York Times, Hemisphers, USA Today and 20 books. She has an MA in linguistics from the University of Michigan and had attended Harvard Law School.

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