Foreclosure is a buzz word that people use all the time. “I’m going to get a great deal by buying a foreclosure.” But what does that actually mean? I’ve had clients purchase and renovate them and turn them into beautiful homes and I’ve had clients get frustrated during the buying process and walk away from them. For investors these may be great ways to make money, but for the average home buyer there are a lot of things to consider.
The reason why everyone thinks foreclosures are great deals is because they are typically the lowest priced houses in the area. What people fail to realize is that they are the lowest priced houses for a reason…actually…for multiple reasons. Let’s look at some of the big ones.
- Foreclosures need a lot of work. They fall into the category of distressed properties. Most people assume that they just need cosmetic work and some updating but they usually need much more extensive work than that. The bank has taken them over from the previous owner and there is usually a significant time lapse from when the bank takes it to when it is actually put on the market by a real estate agent. So the house has been vacant for a long period of time and it has not been cared for.
- The prices are not usually very negotiable. The banks typically feel that they have already discounted the price so they are not willing to lower it much more. You also typically can’t negotiate repairs or credits.
- Dealing with banks is not easy. You need a lot of patience because it can be very frustrating and stressful. They typically put you on a very tight time line to buy the house but then reply very slowly. They are usually very bureaucratic in their decision making so a seemingly simple request or question could go through multiple people and get denied. When the bank accepts your offer they usually override the standard real estate contract with a contract of their own that is typically in the banks favor and if you don’t agree to the terms in it they will usually not make any changes.
- You may not be able to do a full inspection. In many cases there will be no utilities turned on in the home and the bank may be unwilling to turn them on or let you turn them on. So your inspector may not be able to determine if appliances work, if there are leaks in the pipes or if the furnace, air conditioner and hot water heater work.
- Financing concerns – Because foreclosures are typically so distressed most of the time they do not qualify for traditional financing. You may need to either pay for it with all cash or use a mortgage that allows you to borrow renovation costs. If you are buying it with cash then you need the money to buy the home but you also need the money for repairs. If you are using a mortgage with a construction loan then you have less out of pocket however most loans do not allow you to do any of the work yourself.
- You need to have the money to pay the mortgage on the house you are renovating and on another place to live while you are doing repairs. Many times foreclosure properties are so damaged that when you buy it the township only issues a temporary certificate of occupancy. That means that you have to do all the necessary repairs before they will let you move in. In both cases you most likely need time to do renovations before you move in.
I’m not going to say there are no benefits to buying a foreclosure. For example you usually wind up with equity in the house as soon as your finish repairs, the bank will typically pay for part of the title costs, and many banks give preference to homeowners who are buying a foreclosure so you won’t be competing with cash investors.
For the average person, the time and stress that it takes may not be worth it. You have to weigh the cost of the property, repairs, carrying costs (mortgage, utilities, taxes, etc) while you are not living there and the costs of your time. When you add all these up you have to decide whether buying a foreclosure is worth it to you or not.