Thinking about making a move? You might have added a foreclosure to your shortlist of properties to consider. As many state-wide foreclosure bans introduced during the pandemic expire this fall, searches for “pros and cons of buying a foreclosure” have risen 250%. But before you sign any paperwork, it’s important to know the special circumstances involved with purchasing a foreclosure.<\/p>\n
Foreclosures are properties in which the homeowner has defaulted on the mortgage, and someone (often a bank) has legally obtained possession of the deed or title. According to Dr. Susan Jenkins, CEO of Better Homes and Gardens Real Estate Native American Group, a common misconception is that all foreclosed homes are in poor condition or in a poor location. \u201cMany foreclosed homes are in average to good condition and only require minimum cosmetic repairs,\u201d she says. \u201cMost are what we refer to as \u2018scratch and dent.\u2019\u201d New houses can go into foreclosure if an owner meets unexpected financial trouble.<\/p>\n
Of course, there are foreclosure properties that have been abandoned or neglected, too. \u201cYou can run into anything from squatters to standing water, structural issues, and no working utilities,\u201d says Keith Washington, Broker\/Owner of Boardwalk Realty. But don’t let that stop you from researching a foreclosure (and a potential new home).<\/p>\n
\u201cForeclosures can be a great opportunity for those who are diligent, flexible, and persistent,\u201d advises Jenkins. But before pursuing that perfect foreclosure on your route to work, you should know how the experience is different from a conventional real estate purchase, and what extra effort (and money) it might require.<\/p>\n
1. Foreclosures aren’t A Bargain Buy<\/strong><\/p>\n Washington says another pervasive misconception is that people think they\u2019re going to get a steal or a sweet deal when purchasing a foreclosure. Jenkins sees the same misbelief. \u201cBuyers do their research on the mortgage balance or foreclosed amount and assume the bank is only looking to recover the loss,\u201d she says. But these sellers know the market well, and they are looking to increase their return on investment, not simply recoup their loss. When putting in a bid or planning for financing, don\u2019t make the mistake of believing the bank is only looking to recover the foreclosure amount. \u201cYou have to come prepared to be competitive,\u201d says Washington.<\/p>\n 2. Properties are Typically Sold “As Is”<\/strong><\/p>\n In most cases, foreclosed homes are sold \u201cas is,\u201d meaning the seller will not make repairs or concessions like they might in a conventional sale. This impacts lending options (see #5) as well as the time and money put into researching the property prior to making a purchase (see #4).<\/p>\n It can also mean spending more after the sale to remedy any issues. And it\u2019s not just repairs that aren\u2019t covered in \u201cas-is\u201d sales. For example, foreclosures sold by the United States Department of Housing and Urban Development (HUD) place the responsibility, and cost, of utility activation on the buyer, says Jenkins. Although it\u2019s uncommon, some institutions may be willing to address certain issues or adjust costs or payments for some repairs. \u201cHowever, one must always be prepared to adhere to the \u201cas-is\u201d language of the contract,\u201d Jenkins says.<\/p>\n 3. Sellers Don’t Have Much Information to Disclose<\/strong><\/p>\n In a conventional property sale, homeowners are required to disclose their knowledge of the property. There is less transparency with a foreclosure. \u201cSince the home has been acquired through legal proceedings, the bank or servicer has no or limited knowledge of the condition of the home, nor do they have any disclosure or inspections related to the home\u2019s condition,\u201d explains Jenkins. Sellers might also be exempt from certain disclosures when it comes to foreclosures. For example, Jenkins notes that many foreclosures are exempt from state-required disclosures and lead-based paint disclosures.<\/p>\n 4. Research & Due Diligence Are Critical (and Potentially Costly)<\/strong><\/p>\n The burden is on the buyer to investigate the property. \u201cResearch prior to submitting an offer,\u201d counsels Jenkins. HUD homes, for example, list reports and escrow amounts on the addendum section of their properties. You can also do a title search to find out if a property has debt or liens attached. And while not traditionally available, it doesn\u2019t hurt to ask sellers or listing agents about any assessments or property condition reports, says Jenkins.<\/p>\n The buyer also must make the most of the due diligence period. \u201cIt\u2019s in your best interest to have as many inspections as you see fit,\u201d says Washington. This could mean coordinating multiple inspections, including bringing in specialists, for a general home assessment or specific examinations related to the foundation, HVAC, roof, septic system, pool, termites, radon, or mold. These inspections are the buyer\u2019s cost and are for informational purposes only since the property is sold as is. But the investment is worth it. \u201cIt\u2019s on you to know what you\u2019re getting into,\u201d says Washington. \u201cThat $500 could save you $20,000 down the road.\u201d<\/p>\n If you\u2019re looking at a foreclosure during winter months, there\u2019s an added factor at play: winterization. Foreclosures are often winterized to prevent pipes and water lines from freezing. If active utilities are necessary for an appraisal or inspection, this can translate to added costs to de- and re-winterize the property.<\/p>\n 5. Understanding Financing Options Is Key<\/strong><\/p>\n Both Jenkins and Washington make special note that not all loans can be used to buy a foreclosure. With standard Federal Housing Administration (FHA) loans, for example, if an appraisal indicates concerns that need to be addressed, such as mold or peeling paint, then an FHA loan cannot be used to purchase the property. FHA loans are commonly not applicable to foreclosures. However, conventional loans and the FHA203(k) loan (also called a rehab loan) can be used to purchase properties that need repair.<\/p>\n \u201cOne of the first steps in buying any home is talking to a lender,\u201d Washington says. If you\u2019re considering foreclosures, be sure to make that clear to your lender. A lender will help you determine what monthly mortgage payments you can afford and what financing options are available to you. Knowing this will help you be competitive (and comfortable) when making an offer on a foreclosure. Jenkins also advises strategizing with the lender prior to making a bid on a foreclosure so there\u2019s a plan in case of inspection or appraisal issues.<\/p>\n 6. Experts Can Share Valuable Insight<\/strong><\/p>\n Perhaps the biggest takeaway is that working with someone with foreclosure experience can be a tremendous advantage. A real estate professional with foreclosure knowledge can make recommendations about lenders and inspectors, plus they have a sense of what issues might come to the surface when looking at foreclosure properties, says Washington. A lender with foreclosure experience will be knowledgeable about the intricacies of financing options. Both lenders and real estate professionals who\u2019ve worked with foreclosures know what to expect throughout the process, too. They can help understand a seller\u2019s terms and add important contingencies to a sale that reflect the buyer\u2019s homeownership goals. This allows you to safely walk away if an appraisal doesn\u2019t meet your needs.<\/p>\n