Foreclosure properties, for some buyers, have proven to be incredible values. Savvy real estate shoppers who understand the intricate nuances of foreclosure transactions can save thousands upon thousands of dollars. However, the flip-side to that coin is that unsuspecting buyers who aren’t familiar with the dangers and risks of foreclosure properties can lose their life savings and then some in a deal that proved a little too good to be true. Here’s your guide to buying a foreclosure property.
The Nature of the Beast | Defining Foreclosure
A foreclosure property is a property in which the owner failed to maintain mortgage payments and other financial obligations. There are various types of foreclosures, too. It’s a good idea to keep in mind that if a person defaults on their home mortgage loan, they may also be in default of payments to other debtors. The reason the homeowner’s debt is important to you as the buyer is that if there are liens on the property, there’s a chance you’ll be purchasing responsibility for those debts along with the house. The debts attached to the house may stay with the house, not with the owner. Make sure you do your research. Talk with your real estate agent, and know what’s attached to a property before you purchase.
Because foreclosures are tragic for homeowners who are destitute, those owners may sometimes fail to maintain the home’s systems and appliances once they falter. In other cases, people feel the need to lash out against the financial institution initiating the foreclosure and will internally vandalize the property. Rather than investing to make repairs, the lenders instead offer the houses at discounted rates, as-is.
A short sale is a foreclosure at the beginning phases when the owner is still in possession of the property. This is sort of a grace period or a final window of opportunity for the homeowner to take action before the legal foreclosure proceedings begin. During these beginning stages, when the owner is well aware he or she is way past being able to resolve the issue, may try to list the home as a short sale. A short sale means the house is listed for less than what the owner owes. While this may seem like a great value to the buyer because you can submit an offer well below market value and save thousands, it’s not as simple or cut-and-dried as it may seem. In fact, not only does the seller need to approve an offer, but the lender to whom the seller owes funds must also accept the offer. And, if there’s an investor involved, the investor also needs to give his or her blessing. So, in a short sale situation, instead of just offering to buy a house from a seller, you’re trying to win over several individual parties who all have to agree not only on price but also on the timeline. However, in a short sale transaction, all liens on the property are satisfied before the new owner takes possession of the property in most cases.
Auctions are the next phase of foreclosure. When the owner is unsuccessful with a short sale, or when foreclosure is complete, the bank sends the property to auction. At auction, you won’t have the benefit of working with a real estate agent whose goal is to protect your interests, nor will you have the advantage of being able to inspect a property before purchase. Because foreclosure properties are sold as is, the inability to inspect could leave you holding the bag for a whole lot of things gone wrong.
Bank-Owned properties are those that didn’t sell as a short-sale, couldn’t move at auction, and are now the possession of the bank. This is also known as an REO, or Real Estate Owned property. Real estate owned properties, like short-sales and auctions, are sold as-is. Unfortunately, because the bank has no records of how the house was maintained, determining fair market value for these properties is difficult. In some bank-owned properties, you have the right to have the property inspected, but as with the short-sale, won’t be able to negotiate a lower price or costs for repairs. Having a foreclosure property inspected before moving in is a way to gauge how much of an investment you may be making beyond the purchase of the property in the way of renovations, maintenance, and repairs.
Government-owned properties may be the result of government-backed loans gone bad. There are certain programs for veterans and military personnel, minorities, people in certain income brackets, and more. Although you might be able to find a steal-of-a-deal by purchasing a government-owned foreclosure, it, too, is sold as-is and may be in a state of disarray from neglect or malicious intent.
Foreclosure properties are eye-sores in neighborhoods with the strong potential to drive down property values. Even if the foreclosures are in good condition and can’t be differentiated from other houses for sale, the more foreclosures there are in a neighborhood, the harder it becomes to sell other houses in that neighborhood at fair market value. Why would a buyer pay thousands of dollars more for a house on the same street with similar size and style when there’s a foreclosed property available at a great price? For this reason, some neighborhoods heavily populated with foreclosures become magnets for investors who can snatch up the properties at excellent prices and then assist the entire neighborhood by raising property values.
Financing Foreclosures | Cash Purchases and Home Mortgage Loans
Because foreclosure properties are often sold at such great savings, people may appreciate the opportunity to pay cash for their purchase rather than going into debt. Furthermore, in some foreclosure situations, only cash purchases will do. For example, if you purchase a home from an auction, you’ll be required to immediately furnish a cashier’s check for that purchase. You don’t have the luxury of spanning those payments out over the next 15 or 30 years. But there are a lot of risks involved in emptying your nest-egg into a foreclosure, especially one that’s sold as-is with no way to project or predict what may be needed for renovations.
The situation is sad but has happened, where a person with pure intentions turned over their life savings for their starter home, an as-is foreclosure they imagined they’d be able to fix up and remodel to their liking over time. Or, a household who “borrows” the children’s college funds to invest in what they consider to be a business transaction. Unfortunately, repairs and unforeseen expenses can add up quickly, draining every financial resource available until they can no longer afford to maintain the property and sell it at a loss.
Before you decide to invest your cash savings into a foreclosure real estate purchase, make sure you’re financially stable and that you’re not stretching yourself too thin for what you imagine is the deal of a lifetime. You should have enough for your purchase, and for any services conducted during the transactions such as inspections. Even if you pay cash, there are closing costs and expenses for things such as the title check and transfer, among others. Ideally, you’d have a maintenance and repairs fund set aside for renovations, as well as a general emergency fund for added security.
When you’re not paying cash, you may find that funding a foreclosure is a little more difficult than borrowing for a traditional purchase. Some lenders may be hesitant and require more from the buyer regarding credit requirements and down payment. Other financial institutions have developed special loan products in answer to this specific type of real estate. In these loans, the lender assesses the property based on “improved value” as opposed to “current market value” so that you can borrow not only what you need to pay for the property, but also the remodel.
When you are borrowing from a lender for the purchase of your foreclosed property, you’re best off gathering your pre-approval letter for your home mortgage loan before you begin shopping for properties or reaching out for real estate agents. Distressed properties do not have the luxury of “window shopping” or “just browsing” without the intent to purchase. Lenders only want to consider buyers who are qualified, serious, empowered, and enabled to take immediate action.
Patience Is a Virtue | Understanding Your Timeline
Patience is always an excellent trait to have, but one that’s mandatory in foreclosure real estate transactions. Real estate transactions, in general, take substantial amounts of time. Generally speaking, houses may sell within 30-90 days of being listed. However, foreclosure properties can take months, if not years, to close. These transactions are complicated because all parties involved have to agree on both price and timeline. If a homeowner offering a short-sale and a buyer agree on a price, and the bank also agrees, but there’s an investor who is taking his or her time in complying, the transaction could fall through. You may experience adequate savings in a foreclosure, but part of the trade-off for those savings is the time it can take, and the tasks involved, in pursuing foreclosure real estate properties.
A young family eager to move before the birth of a child may not do well seeking short-sale properties simply due to the time constraints whereas an investor whose only intent is to flip the house may have nothing to lose by playing the waiting game with lenders.
Finding the Right Real Estate Agent
Real estate agents are not difficult to come by, but they’re not all created equal, either. When you’re seeking a short sale or other foreclosure property other than at auction where representation isn’t permitted, your goal is to find a real estate agent who is as passionate as you are as finding a great deal in a foreclosure property.
You’ll want to find an agent with whom you are compatible, so it’s important that you feel like you can speak freely with your agent. You’ll have plenty of questions and should feel satisfied with your agent’s ability to answer your questions completely and compassionately. Your agent should also be familiar with the areas in which you’d like to shop so he or she can help point out the benefits and nuances of the neighborhoods such as public transportation, parks, schools, restaurants, shops, and more.
Beyond the standard “good business practices,” you’ll also look for an agent who is certified or specializes in foreclosed properties such as short sales. Because short-sales and foreclosures are unique and differ greatly from each other based on lenders, the short-sale real estate law is detailed and different from standard real estate transactions. Agents who specialize in foreclosures may have knowledge and insight about risks, warnings, benefits, and perks of purchasing foreclosures that other agents lack.
Your Reason for Purchasing Foreclosure
If you’re considering foreclosure properties for your residence, try to limit your options to homes that allow for a home inspection. Give yourself the advantage of being able to gauge what you’re getting into for repairs. If you’re starting out as an investor with the hopes of flipping properties, talk with other successful investors first who can offer realistic tips and tricks based on their experience. But do not take your life savings and toss it into a real estate auction with the hopes of getting rich quick on a flip.
Foreclosure properties, for savvy buyers, may translate to thousands of dollars’ worth of savings in exchange for reasonable repairs and maintenance. However, for those who are unsuspecting and unprepared, foreclosure properties could convert to a tragic loss of savings and a bottomless pit of expensive fix-it projects. Seek out a qualified real estate agent who specializes in foreclosure properties which can help you navigate the tricky waters of buying a house someone else couldn’t afford to keep.
Call The Wright Choice Team today at 804-307-2589 to tour available homes for sale in the Chesterfield County area.