Should You Consider Purchasing a Foreclosure?

You may have heard a plethora of conflicting information about foreclosures. As is the case with any real estate transaction, each foreclosure will be its own unique situation. To get you started, here are some basics about foreclosure properties.

From the buyer’s perspective, there is little difference between purchasing a home through a standard sale versus a foreclosure. Buying a foreclosed home is not a guaranteed deal like it may have been a few years ago, but if the property appeals to you, there’s little reason to avoid a purchase just because it’s a foreclosure. 

A foreclosure, also called an REO, is a property that has been repossessed by the bank and is being resold after the homeowner fails to repay the mortgage. Because the asset manager has never lived at the property, the bank is exempt from providing the information normally provided by the homeowner. However, a buyer still has the right to a home inspection, and no seller questionnaire will exclude the need for a thorough and professional investigation.

Perhaps the biggest difference between a standard sale and a foreclosure is what the home inspector will find during the course of their investigation. In a standard sale, the homeowner has a vested interest in the property selling quickly and for the most amount of money possible. These houses are usually clean and don’t need major repairs. In the case of foreclosures, there are a whole host of possible scenarios that can affect a property from the time the homeowner stops making payments to when the house is put up for sale. Some people feel they are being forced out of their homes and will make attempts to sabotage the property. Some realtors have seen cement flushed down toilets to destroy the plumbing, or graffiti spray-painted on walls. Some occupants will take anything of potential value from the property: appliances, fixtures, flooring, copper pipes and wiring, yes, even the kitchen sink. However, there are plenty of properties that are perfectly fine. The word “foreclosure” really does apply only to the type of sale and not to the condition of the property.

In a rising market, a foreclosure is a great option for a buyer intending to live in the home. When making an offer on a foreclosure, your realtor should contact the listing agent to get an idea of the flexibility of the asset manager. Sometimes the selling bank may fulfill requested repairs, but not always. If they do not, and you have a loan that requires the house you buy to be in good condition (such as a VA or FHA loan), your offer could be rejected. But because so many loans that were foreclosed on were backed by the government via Freddie mac or Fannie Mae, the bank is incentivized to return the properties to owner occupants, giving them the advantage over investors with cash.

Depending on what type of loan the original homeowner had, the bank may be able to offer the new buyer a loan type that allows for money for repairs in addition to money for the purchase. However, there are fewer REOs available these days are banks are in no hurry to recoup a few hundred thousand dollars, so don’t assume the house is priced under market value. Look at comparable properties just as you would a standard sale before making an offer.