The Truth About Buying A Foreclosed Home

Once the realm of only seasoned real estate investors, the interest in purchasing foreclosed properties has fanned out to a growing number of ordinary home buyers.   As the sub-prime lending fiasco continues to push homes into foreclosure and news stories appear everywhere about the record number of them hitting the market, many prospective home buyers are eyeing these properties as a way to get a lot of house for little money.

There seems to be a big misunderstanding by the public, however, about the value of homes that have been foreclosed.  People tend to think that a foreclosed home presents a bargain, especially those who are looking for real estate investment property.  They think that they can buy a foreclosure cheap, do a little fixing up, and sell it for a hefty profit or rent it out or even keep it for their own home, expecting to reap instant equity.  Well, it doesn’t work out that way very often.

Out here in the trenches of real estate, I have been seeing an increase in foreclosed homes dumped on the market and the number of people looking for such homes who are expecting to purchase one for pennies on the dollar.  I have home buyer clients who specifically want to evaluate only foreclosures or HUD homes, those offered by the government, usually by a bidding process, because they want a house that they can buy cheaply and work on it while living in it.  As it turns out, most end up buying a conventional home once I show them a couple foreclosures and they begin to understand what they are up against.

Banks are not stupid.  They know the value of real property and are not about to give it away.  It’s an asset to them, not a liability.  When they have to sell a home that they have repossessed, they offer it at market value, not necessarily for what is owed on the house.  The first thing they do is send a certified real estate appraiser to the property to determine a fair market price based on comparable homes sold in the area and any defects that may be present in the home.  Whatever figure the appraiser comes up with is what the house will be priced at.  And it isn’t cheap.

It is true that many foreclosures are priced lower than seemingly comparable homes in a given area, but they are almost always in very poor condition, sometimes requiring extensive repairs.  And this is where the danger comes in.  Foreclosed properties are sold “as is”, meaning that when you buy the house, you have to take it in it’s present condition, the way you see it.  You can have a home inspection, but you can’t ask the bank to make any repairs to defects found or credit any money back for such repairs.  Once you have a contract, you can’t get out of it because you discovered a major defect and the bank refuses to correct it.

If you do your homework, however, and are smart about the whole thing, there are bargains to be found from time to time.  Since you never know what a property’s true condition is by a cursory inspection, it makes sense to hire a home inspector before you submit a purchase offer.  That way you will know what repairs need to be made and you can then find out the cost to make repairs and easily determine if the asking price of the house is worth the repair expense.  A lot depends upon if you are going to live in the house yourself or if you are going to flip it or rent it.  A foreclosure is much more risky if it is purchased for investment purposes than to live in.

The more thoroughly the house is inspected and the neighborhood and market researched, the easier it is to make a decision on whether a particular foreclosed home is right for you.  Remember, when a house has been vacant for a long time without regular maintenance, which is often the case, even a home inspector can miss damage that is not apparent, but may be lurking behind walls and floors.  Leaking water, vermin activity, and rot can occur in areas not visible to even the most thorough inspection without tearing out walls.  These latent defects can manifest themselves at anytime and cause extensive damage.  Consider also that many foreclosed homes were neglected by the previous owners, adding to the possibility of unforseen problems.  I see this out here in the field all the time.

If you are determined to buy a foreclosed or HUD home, do your homework.  Work with a competent real estate agent and know the real estate market, the condition of the property, and the cost to make repairs.  No matter what your objectives for buying a foreclosure are, get the facts.  That bargain property could turn into your worst nightmare.  The old adage of “Buyer Beware” certainly holds true when it comes to buying foreclosed property.  I could tell you horror stories. Stay tuned.  I may relate a few in future articles here.  You can get some helpful information on the subject for free at one of my favorite real estate websites, http://www.VirginiaRealEstateNetwork.com .

There are going to be more foreclosed homes coming on the market over ensuing months and there will be some excellent pickings if you know how to spot and properly evaluate them.  Move fast when you do find one.  You’re not the only one eyeing that property.

Ciao for now,

Bernie Rosellen, Your Agent In The Field