What is really the truth behind buying a forclosed home? I need opinions / advice / experience on it..?

Question

Thanks!

Answer 1

I was looking at distressed (foreclosure and short sale) properties for about 4 months here in San Diego. My real estate agent was a long-time friend and didn't have much experience with foreclosures or short sales (bank agrees to take less for the house than what's owed to pay off the mortgage). And, we got quite an education over that time.

The first thing people always say is to make an offer on a foreclosure that is significantly less than the listing price. They say that a bank is losing money every day they own the property and will be very agreeable to lower the price. However, consider that there are lots of people out there buying them. I put in 6 offers on properties before I finally had one accepted. The first couple were low-ball offers. The next couple were at or 5% above the asking price. And, the one I finally got accepted (a short sale) was for the asking price.

Many times, competing offers on foreclosures are 100% cash. That's the offers that the banks jump at, because there's no hassle with financing and no chance the property will fall out of escrow because of a financing problem. So, even if you make an offer above the asking price, if you're going to finance some part of the purchase, you could easily get aced out of a property by a lower cash offer.

As someone else mentioned, the risk of buying a foreclosure is that the bank (owner) does not have to submit a transfer disclosure statement (TDS). A TDS, which is required for non-foreclosure sales, is a description and affidavit the seller fills out and signs as to the exact known condition of the property (all included amenities and known problems with the property).

If a seller knowingly omits something on a TDS or outright lies about the condition fo the property, a buyer can come back and sue the seller - and his agent - for costs arising due to repairs. But, since a bank does not have to submit a TDS, a buyer of a house with severe hidden problems is stuck with the cost of the repairs. And, what started out to be a good deal on a cheap foreclosure can quickly turn into a money pit with no recourse for the buyer.

Another thing about foreclosures: many of them are trashed and/or stripped by the previous owner prior to moving out. And, I mean everything, even if it is nailed down. I saw one foreclosure condo that was about $40K cheaper than model matches in good condition. It had no cabinets, no appliances, no countertops, no light fixtures, no wall heaters, no inside doors, and no shower heads. The bath tub was also filled with what looked like dried wood stain. And, one toilet had been removed and set off to the side (the drain was sealed, but we feared someone may have poured concrete down the hole).

So, while the price was excellent compared to the other units in the complex, it would have cost at least that much to bring it back up to that condition. And, there was the uncertainty of what else might have been wrong with it, that the bank didn't have to disclose.

Short sales do require the sellers to sumbit a TDS. But, then you have the problem of the bank possibly not accepting the submitted offer, even if you offer the listed price. This is because the bank instructs the seller to sell the home for whatever they can get for it. And, once the offer comes in, the bank reserves the right to refuse the accepted offer if it's not high enough. So, some short sales can drag on for months, until they finally go into foreclosure. Then the bank seizes the home and relists the property. So, your offer is now null and void.

There are lots of good deals to be had in a distressed market. The unit I got was move-in ready and it cost $200K (it peaked at $385K in 2005). It's a rental for my kids while they go to college. Their rent is the mortgage payment. So, they'll live there for a few years and, if they move out, I can rent it for about twice the mortgage payment. Then I'll sell it at the top of the next market in 7 to 10 years (at least what it was at in 2005) and turn a tidy profit.

Answer 2

Several of my clients have purchase foreclosed homes, and have done well.  What I'm talking about here are "REO" properties (Real Estate Owned by the bank).

As someone pointed out, often buying at the courthouse steps is the best deal.  However, if there is a mortgage involved (why else would there be a foreclosure?), you're usually bidding against a bank with deep pockets, who is only essentially paying themselves for the proeprty if they win the auction.

REO properties are exempt from seller disclosure requirements here in NC.  This makes sense, as the bank usually know little about the property.  Often, they haven't even seen it!  Most REO sales are "as is" - they're not going to fix anything that you might find wrong with the property.

Like any other property, a REO property might be a good deal, if the price is right for what you are getting.  One thing that helps to make REO properties a good deal is that often, the bank needs to get only what they loaned on the property.  They might start out trying to sell it for a profit, but if it doesn't sell, they generally mark them down more quickly than your average seller.

Some REO properties wind up getting trashed by the prior owner before they move out.  I have seen REO properties that were heavily vandalized inside and out (broken windows, holes punched in sheet rock, etc), and others from which everything of value (heating and A/C system, plumbing fixtures, kitchen cabinets, windows and doors) had been removed.

What's the bottom line?  While an REO property might be a good deal, each must be evaluated on it's own.  Get a professional home inspection so you know what you are getting into.

Answer 3

Foreclosed homes are not necessary a good deal like many people thing. It depends on the mortgage amount the previous owner have on this property. Many times those house are without utility and you can't check if heater, AC, plumbing work properly. You baying those houses "as is" and many times banks don't want to pay for survey.

I bought 2 houses like this, but you need to do your homework if it is worth the money for improvements- those houses many times are without appliances and they sitting without heat and AC for more then 1 year and they require remodel.

Answer 4

The trick is to buy the foreclosed home before it goes into foreclosure. Not after the bank has it on hand.. I have done both, and got better deals from the owners than a bank... But banks will also sell at appraised value, and you don't feel like an A*** in putting someone out of their house...

Answer 5

I have yet to figure out why so many folks are excited or interested in buying a foreclosed house.  Maybe it's the endless advertising surrounding such.  At any rate, buying a foreclosure is very much like buying any OTHER property. Some appear to be sold for fantastic deals, but generally close examination indicates that you get roughly what you paid for.  If they are sold cheaply, they are perhaps damaged or in need of substantial repairs.