What Should You Know About Foreclosures?
I hear a lot of mention from buyers about foreclosures and the possibility of a good deal on a home, but the knowledge base seems to stop there. Have you considered buying a foreclosure but not sure about what a foreclosure is or how the process works? Here are a few main concepts you should be aware of. Our office has completed approximately 1,000 foreclosure transactions so I'm happy to impart my wisdom!
1. What is a foreclosure?
A foreclosure property is a home that is owned by the bank because the previous owner defaulted on their mortgage payments, that is, they did not pay their mortgage and the bank which held the mortgage reclaimed the property. This means that the bank is trying to sell the property, not a homeowner. Before a foreclosure is finalized, you may see homes listed as pre-foreclosure (meaning they are very behind on mortgage payments) or possibly as a short sale (where the homeowner is trying to sell their home at a discount before being foreclosed on - the "short" refers to the price being "short" of what the full value of the home is).
A foreclosure can often go to auction first and if it is not successful, it becomes real estate owned and is listed typically on an MLS with other local listings.
2. I'll get a sweet discount, right?
Depends - much like everything else in real estate ;) Once the home is foreclosed on, it's up to the bank (the seller) to determine the best plan of action for the home. They can choose to sell it as is, with some repairs that allow for more types of loans, or to complete full repairs. They often determine this by how much the home is currently worth vs. what it can be worth repaired and if their return on investment is worth it.
Our office sells a fairly equal number of foreclosed homes that have no/minimal repairs and those that have been mostly or fully updated/repaired. Since the value of the homes are determined by fair market value, they're not going to be listed for prices much different than if they were owned by a person. The one main difference you'll find is that there's no emotion involved with a bank - they want the best price and easiest closing terms, but aren't going to be swayed by a love letter. You can sometimes find price reductions with foreclosure properties that have been sitting on the market for a while, so that might be a good spot to jump in!
3. With the bank involved, foreclosures must be super complicated?
Honestly, not really! People tend to get the concept of a short sale and a foreclosure confused. With a short sale, the bank has to agree to the price you've offered and THAT can take one, two, three months sometimes to hear back. With a foreclosure, the bank is ready to sell! The main difference is often foreclosures have a little extra language and may include more legal documents to sign - I do these frequently so for me, they get done like clockwork. The additional paperwork can include things like a lead form, a property condition report, an owner occupant form, a smoke detector form, etc. It's mostly just a lot of initialing on your part and not anything particularly scary.
4. So...what's the catch?
The only possible downside is you're not going to get a very clear picture of the home's history with a foreclosure. There are some lovely homeowners out there who keep records of all their home maintenance, when they got a new roof, who mows their lawn, etc. With a foreclosure, you get a very limited history of repairs and maintenance because a person no longer owns the home and very likely has not left a packet of info behind. While this might sound unnerving, this is why you do a home inspection! Often a furnace or hot water heater can have an installation date on it and an inspector can give a good estimate of how old the roof is, and many other ages of items aren't as important as their condition. Look for a good home inspector who will give you a thorough report of the property's condition.
If the property needs repairs, it can limit your financing a bit, too. If you're paying in cash, no problem. If you're getting a mortgage, the property has to meet the minimal property conditions of the type of mortgage - FHA loans are more stringent than conventional loans and if the property needs significant repairs, you may have to switch to a conventional renovation or 203K Loan (which is an FHA renovation loan) which can be a little complicated.
5. How to buy a foreclosure
Step 1 - call me! I'm experienced with foreclosures and have been involved with and completed many foreclosure transactions. I am your go-to foreclosure guide! Feel free to contact me with any questions about any of the topics discussed above or anything else I may have left out that you have questions about with this process.