You’ve probably seen the stories and ads—foreclosed houses and condos selling for pennies on the dollar—and there’s no question banks are willing to sell their REOs (real estate owned properties) at sizable discounts. But foreclosures almost always come with complications that smart shoppers need to know about in advance.
Here’s what you need to know before you dive into this niche market of buying a foreclosure.
Know What to Expect From a Foreclosure
A foreclosure probably won’t be in pristine condition when you buy it. Foreclosure proceedings often take months (more than a year in some states) before the owners are evicted from the property.
During that time, the house is in legal limbo. The occupants have little incentive to maintain it or make repairs, and the property inevitably deteriorates. In some cases, the foreclosed borrowers vent their frustrations with the bank on the house. Sometimes cabinets and fixtures are ripped out, holes placed in walls and even heating/air conditioning systems are damaged.
After the eviction, foreclosed houses then frequently sit empty for months while the bank decides how to resell and for how much. Sometimes the bank may perform basic repairs, but often, the house is in a rundown condition when it is finally offered for sale.
Get Pre-Qualified Before Buying a Foreclosed Property
The first step is to get pre-qualified by a mortgage lender. Foreclosures are usually great deals, and they get gobbled up very quickly.
Don’t wait to apply for financing approval, which takes at least a week or two to obtain. Make sure you have enough to cover the down payment once you find a foreclosure—and that you can cover inspections, insurance, pest control and any other unforeseen expenses that may come up.
Get Professional Help With Buying a Foreclosure
Most banks hire real estate agents to list and market their foreclosures. They represent the bank in all negotiations, not you.
To ensure that you have adequate representation, have a realtor who specializes in the area serve as your buyer’s agent and to advise you on key issue. These issues include pricing, local zoning issues or state law constraints that could seriously affect your purchase. For example, some states have mandatory “redemption” periods in which foreclosed families have the opportunity to reacquire their homes.
A buyer’s agent can also help you check the local public records to determine whether there are any recorded liens against the property you are considering. These might include liens for unpaid taxes, repair bills or homeowner’s association dues: If you purchase the home, you will have to pay off any outstanding liens.
Final Steps Before Buying a Foreclosed Property
Once you’ve found a home, bring in a building inspector and a contractor to give you a good idea of what needs to be done and the approximate cost of the work. A report of the property’s condition will be submitted to the lender before the loan is made.
As a potential buyer, ask yourself these questions:
- Am I prepared to invest the money and time needed to bring this house back to a habitable condition? Do I know all the problems the house presents?
- If the utilities have been turned off for months, do I know what works in the house?
- Have I been given enough time to get the house professionally inspected so that I have detailed knowledge of how badly off the property may be?
Ready to make an offer? Work with a realtor to negotiate a good deal. Many lenders are willing to offer lower down payments, repair reimbursements and other incentives for the right buyer.
Written by Darren Wilson, The Wilson Team