Interest in buying a foreclosed home is slightly on the rise; but so are concerns about the risks involved in the process (and there are many!). In a December survey, It was found that 49 percent of Americans were at least somewhat amenable toward buying a foreclosure. But the number of US adults who believed there are disadvantages to buying foreclosures was 81 percent!
Among those folks who had qualms about purchasing a foreclosure, the top concerns were:
•that buying a foreclosure would involve hidden costs,
•that the buying process itself is risky, and
•that the home might continue to lose value after escrow closes.
While there certainly are substantial risks that run with buying a foreclosed home, the most risky way to do it is also the least common method: at the foreclosure auction itself. Auction buyers don't have the opportunity to fully vet the foreclosure to ensure that they are receiving clear title and/or to make sure they're not getting a bad property.
That having been said, most foreclosures are resold not at the foreclosure auction, but as an REO (short for Real Estate Owned - by the bank), listed by a real estate broker on the Multiple Listing Service.
When you buy an REO in this way, you have lots of opportunities to use some tricks of the trade (so to speak) to avoid some of the traps you may fear.
1. As-is means as-is, period. Banks have very little interest in doing repairs on a home. Generally speaking, bank-owned homes are sold on a very strict "as-is, where-is" basis, which just means that you should expect to take possession of it, if you buy it, in exactly the condition and location as you see it, no matter how defective. Do not walk into a viewing of a foreclosed home, notice how the plumbing is all ripped out of the wall, and make an offer for it, assuming you'll be able to get the bank to "fix" it before you buy it. Usually, if the bank is willing to do any repairs to a foreclosed home, they do so on the advice of the listing agent prior to the home being listed. If it isn't fixed by the time you view it, it probably won't be.
If a foreclosure you're considering has obvious property damage, before you make an offer on it colllect whatever information you need in order to get as comfortable as possible with your offer price, assuming that the bank will NOT be chipping anything in for repairs.
2. The bank will remain quiet about the property's condition. When it comes to real estate disclosures, the fact is, the bank speaks not much of anything! Many states exempt banks and other types of corporate homeowners from making substantive disclosures about the condition of the property. Even in jurisdictions where the bank is not legally exempt, most banks will simply write across the required disclosures something to the effect that the bank has no knowledge of the property's condition. (Before you protest with a "that's not fair!!" keep in mind that the bank never lived in the property, so most often truly has no idea of any important facts or details about its condition or location, the things an average home seller would be required to disclose.)
Even in a normal transaction, it behooves a buyer to be thorough in having the property inspected and meticulous about reviewing the resulting inspection reports. But buying a foreclosure ups even that ante, as you have no seller disclosures to highlight particular problems you should have looked at, and none of the usual legal recourse you would have if a “regular” seller made incomplete disclosures. Get a property inspection. A pest inspection. A roof inspection. A sewer line inspection. A pool inspection, if there is one and you care about its condition.
Yes - all these inspections cost money, but the drama and thousands of dollars each of them can save you is well worth it. And read your state’s buyer inspection advisory or similar document (ask your agent), just to make sure you’re aware of all the inspections that are available to you; and work with your agent to determine which ones make sense.
Some insider tips:
•Vacant foreclosures often have their utilities disconnected. Work with your agent to make sure the utilities get turned on - even for a single day - so that your property inspector can run the water taps, test the stove and dishwasher, see if the water heater and electrical outlets work, and so forth.
•If appliances are there, the bank will probably leave them there, even though they may not have technical “legal” ownership of them, so they may not be included in the contract, like in a "normal" home sale. However, the bank will not give you any sort of warranty on appliances, so try to obtain any warranty coverage you want or need elsewhere - from a home warranty company or the original manufacturer/retailer.
3. Contract terms change!. One thing squarely in the purvue of local real estate pros are local market practices. From negotiating practices to which party pays which closing costs, every market is different; and experienced local agents are experts on this information. If you’re buying a foreclosure, though, the bank will often require you to use its own purchase contract rather than the more commonly used state forms. Many times, this is done to advise the buyer of the bank’s refusal to make substantive disclosures (see above) and to change some of the normal practices for your area to the bank’s standard practices.
The bank’s contract will probably won't allow any "contingencies", so an offer will operate on an objection period. In "objection" based transactions, you have a certain period of time in which you must either speak up about your concerns with the property and/or cancel the deal, or you will automatically be presumed to be moving forward with the deal and your deposit money will be forfeited if you change your mind after that date.
READ every word of the contract you sign when you buy a home from the bank; and ask your broker, agent or attorney to explain anything that doesn’t make sense.
4. Expect the unexpected. When you buy a foreclosure, you might end up working with the bank’s escrow company instead of a company you or your agent selects. And the bank's escrow provider might be slow or disorganized. C’est la vie. The bank might rush you for your deposit money and then take their own sweet time coming up with the necessary signatures on their end to close the deal. Par for the course. You might expect that the bank would be desperate for buyers and, instead, find out that there are 20 offers on the same REO (they don't have to disclose that to you). Or, you might be the only offer and still get your aggressively low (but still reasonable) offer rejected, only to have the bank reduce the list price of the home to the same price of your offer! (They often want to see if exposing it to other buyers at the new, lower list price might generate more interest and higher offers.) Just remember: banks don't play by the same rules as individual property owners!
When you’re buying a foreclosure, expect glitches; expect your calendar to be derailed; expect the bank to be inflexible and possibly even unreasonable. It’s not overkill to ask your broker or agent to brief you on the common complications they see in REO transactions. Having realistic expectations may keep you from pulling your hair out. And if the transaction turns out to run smooth as silk, you’ll be pleasantly surprised - VERY surprised!
My recommendation to my own customers is to avoid trying to buy a foreclosure. You should take care of your blood pressure!! And besides, in most cases a better deal can be made with a homeowner.