How to Buy a Foreclosed Property

If you are looking at a purchasing a house either to live in or for a real estate investment, here are some tips and guidelines to think about when purchasing a foreclosure. While a foreclosure is oftentimes a great deal, there are some important considerations with each type of foreclosure transaction.

The Foreclosure Differences

There are three main types of foreclosures a buyer will consider. The three types of foreclosures are short sale (pre-foreclosure), auction foreclosure, and an REO property. Buyers can win all three ways only if they know what to look out for.

Short Sales and Pre-Foreclosures

A pre-foreclosure is also called a 'short sale' where a buyer and seller work together. This is great for the seller as the credit report will not have a foreclosure stated which can dramatically affect future credit scores, and the buyer wins as everything they want to know about the house is disclosed as the seller is the homeowner. The buyer won't have any surprises at the end of the transaction. In this case, the buyer (future homeowner) and seller (current homeowner) deal directly with each other. The bank will accept the new price or not to make the transaction go forward.

Houses Sold at Foreclosure Auctions

Foreclosures sold at auction can yield great financial deals for the buyer, but also come with great risks. These houses are purchased mostly with cash up front, and without any disclosures or inspections.

Auctions aren't for the future homeowner looking for a house to live in as the buyer may be getting more than they planned for, like an original homeowner who won't leave (new buyers do evictions themselves) and the liens on the property may be surprising. For example unpaid taxes, work that a contractor has done but has yet to be paid for or home owner's association dues and penalties unpaid. All these have to be paid for and a buyer may not now this without a full title search, which in most cases are not done prior to a buyer going to an auction.

REO Properties

The best case scenario for buyers is to purchase a property that is bank owned, also called an REO property which stands for 'real estate owned.' This is where a foreclosed house isn't sold at an auction and the bank is essentially stuck with it. Surprisingly some are just below real market value. The value in purchasing these types of properties is they come with a clean title and they can be inspected prior to moving forward in the transaction.

The downside to these is some banks aren't willing to budge very far from their asking price if the house is new on the market and work that is asked to be done may be denied (sold as-is disclosure exempt). Most REO houses come with little disclosures so inspections are always a good idea. Never purchase an REO as-is with any inspections. Oftentimes once a bank has possession of the house, it is repainted and new carpets are installed for a quick sale. What if there was roof damage that no one knew about until the bank just received possession? Paint may cover up a stain and a roof section may be fixed to prevent future leaks, but mold may be growing that only a mold inspector can analyze and confirm.

Also, while banks may be exempt from disclosures, if any inspections are done they have to be revealed to the next buyer. So, if a bank is being stubborn and will not pay for anything and an inspection is performed and mold is found, the bank has the option of remediation or having the potential buyer canceling. If the transaction is cancelled the next buyer will have to be told that there is mold growing or is present. While very expensive, a mold inspection is ammunition for the future buyer to have the work done as not many buyers will purchase a house with mold inside of it. It is much easier for the bank to take care of it now then to have a property sit for a long time with no buyers and the chance for even greater mold damage.

While a foreclosure may be a great deal on the onset, for the buyer looking for a home to live in here are some things to consider prior to purchasing:

• Where is the property?Just because a property price is half what the appraisal is, if it is in an area with bad schools or high crime, it doesn't really matter. Remember, location, location, location is key for the person living there.
• Is it only As-Is? If it is a short sale or an REO property, ask for Section 1 pest work to be done at the minimum. This is damage done to the house resulting from termites. If there a mold inspection comes back positive, ask for proper remediation.
• What work needs to be done? Landscaping is only the tip of the iceberg. If a mold inspector detects mold, you or the seller will have to remediate it properly. Home and mold inspectors sometimes charge very high fees but they are necessary to know what may be wrong with a house that can't be seen. Broken pipes and missing appliances may also need to be replaced.
• Is the title clear? This is where there are no liens against the property, and all previous tax bills are paid for.
• What was the last tax bill?This is something that many buyers don't consider. Just because you purchase a house for half of what the previous owner paid for it, the tax records will still show the old value until it is updated. It is the buyer's responsibility to pay for the taxes until the pricing is updated, which may be a surprising and painful surprise if the house was taxed at 600,000$ and the house was purchased for 300,000$.

Great deals can be made when buying a foreclosure. Just be sure to do some homework and always do inspections. Just because a house is sold as-is doesn't mean the buyer should take it that way.