Is buying a foreclosure property a good deal?
As the inventory of properties on the market increases, new home buyers may consider foreclosed properties as a viable housing choice. But there are pros and cons home buyers need to consider when purchasing a foreclosed property.
A foreclosure occurs when a bank repossesses a home from a borrower who has failed to live up to their obligations on the mortgage note. The foreclosing bank then offers the home for sale at a public foreclosure auction. The highest bidder at the foreclosure auction purchases the property “as is” and is awarded title to the property with all liens and encumbrances that come with it. Many times, the bank holding the note on the property is the highest bidder at the auction. In this case, the property becomes “bank-owned” or “real estate owned” (REO) property.
For the average first-time home buyer, purchasing a home at a foreclosure auction is a risky endeavor. Two potential pitfalls are buying a property without the opportunity to complete a home inspection or buying a property without even entering the home. You won’t know about any major repairs until it’s too late. You might also lose your deposit if you are unable to get a mortgage in time for the auction.
Additionally, when purchasing a home at foreclosure auction, you become responsible for all outstanding liens and debt against the property (such as unpaid property taxes). And if the former owners are still living in the home, it is your responsibility to evict the current occupants in accordance with the law.
A better option for the first-time home buyer may be to purchase a bank owned property. Typically, once the bank owns the property, it addresses any outstanding issues. You also gain the ability to have a home inspection done as a contingency to purchase. With that said, an REO property should still be viewed as a potentially distressed home in need of repair, because many times these properties are vacant for months.
There are many people involved and many decisions to be made by the bank and its investors before an REO property can be sold. By working with an experienced Realtor, one who has dealt with bank-owed properties before, you can minimize your headaches and anticipate bottlenecks throughout the process.
Purchasing an REO property also requires special negotiating skills. This is where an experienced Realtor can help as well.
The fewer contingencies you have in your purchase and sales agreement when making an offer the better it is for the bank. However, it is a greater risk for you. You need to find a balance between what you can live with and what you need. Selling banks have committees or individuals that review each offer on REO properties. Adding contingencies increases the time needed to review your offer, so get it right the first time.
On the mortgage side, not only do you need to qualify for the mortgage, but the property needs to be qualified for the mortgage. Do not make an offer on a home until you are pre-approved for a mortgage. Understand and know the limitations of your mortgage. If you need bank approval or a home inspection on a property, write that into the purchase and sales agreement when you make your offer.
Also, on the day of closing, always do a walk-through of the property first. If the property has been vacant, there may have been changes to the property since your last visit.
The risk of buying a “money pit” can be real if you do not educate yourself and take all precautions to ensure that you are buying what you think you are buying. With a little work, purchasing a bank-owned property can be a worthy investment opportunity if you have patience, good communication and an understanding of all the risks.
Andrew Cadorette is education coordinator of the New Hampshire Housing Finance Authority.