« Claremont’s Packing House Is Open For Business | Home | Go Play On The Freeway… The 210 Freeway That Is! »
Buying Foreclosures: Are You Getting The Home Of Your Dreams Or Just Buying Trouble?
By Tisza Major-Posner | June 20, 2007
Hi All,
Lately we have all been hearing about the rising number of Foreclosures. (Here in Claremont, we are very fortunate to not have very few properties ever go into foreclosure.) And some folks, quite a number in fact, are rejoicing in the opportunity that buying a home in foreclosure provides… Or does it? I think Foreclosures are a bad thing, not just for the person who lost their home but also, potentially for the person buying that home as well.
Sure, we all want a great deal and everyone fantasizes about finding that million dollar home for a hundred bucks. But people have also believed for centuries that Leprechauns are hiding a pot of gold too. Now I am not saying that there is no such thing as a Leprechaun (far be it from me to fly in the face of centuries of lore), but I am doubting the pot of gold. And that pot of gold, much like the hundred dollar foreclosure in perfect move-in condition is also a myth.
Also, consider that by choosing to buy your next home only from a foreclosure sale, you are really saying that you are hoping to profit from someone else’s misery.
For that reason alone, I am not personally a big fan of buying a home at a foreclosure sale. The bad juju that may be attached to the home is a factor for me, but there are a number of other things you should consider before deciding to buy a foreclosed upon home:
1. In most instances, you can’t inspect the home before you purchase it.
Buying something sight unseen can be dicey. Even if you have seen a photo of the home, chances are that you will not be allowed inside before you buy. Remember that you are not just buying the house; you are also buying the neighborhood it sits in. And while the home can be cleaned up, repaired or even replaced, the neighborhood is what it is.
2. You are buying the property absolutely “As Is”.
Usually this means that there will be no repairs of any kind made. So, if the home is riddled with termite damage, too bad. If the counters have been attacked with a sledge hammer, tough. If the whole house was used as a litter box for years, bummer.
3. People who know that they are losing their homes are not always nice to the home before they leave.
I have heard of instances where buyer’s of foreclosed properties arrive to view their purchase only to discover that all kinds of intentional damage had been done, carpeting and tile was removed, holes were smashed into walls, homes were intentionally flooded and left to mold, plumbing fixtures have been destroyed, copper wiring and piping was pulled out for scrap sale, plaster has been poured down pipes, twenty years worth of trash is still in the house. You get the picture
4. You may not get such a great deal after all.
The few properties that do go into foreclosure for small amounts will usually have a lot of competition for them from investors so you could be out of the game before you even get in. Or, you may wind up paying almost as much as you would have if you would have purchased a home without the foreclosure sale, but you may be getting a house in much worse shape then you expected.
Typically, a foreclosed upon property sells for about 5% beneath fair market value. Not a huge savings. Buying a home that is not in distress, or one that is but has not reached foreclosure could be a much better deal as these properties may sell for below and sometimes far below market value. Especially if you have a good negotiator, like me, working for you.
5. Generally speaking, you need to have more cash readily available to purchase a home from foreclosure than you do to buy a home in a more traditional and less pressured manner.
If you choose to buy a home “on the Courthouse steps” which is where a foreclosure sale actually takes place, you will need to show up at the appointed time with cash, or a cashier’s check in the amount of a minimum of 5% (typically) of the final winning bid amount. You may then have as little as one business day to produce the balance due or risk forfeiture of your 5% good faith payment.
On a $300,000 final bid price, you would need to walk in the door with $15,000 in cash (or as good as) and already have the funds in place to pay off the $285,000 balance almost immediately. Most of us are not in the position to do this.
6. Just because you “bought” it does not mean that you will get to keep it.
If there are additional liens or loans against the property, depending upon the type and upon the entity that placed them there, you may have only bought the first position in the chain of debt but not fulfilled the financial obligation to the other debtors. So, you could have merely bought yourself into the position that the previous owner found themselves in when they lost the property to begin with.
Also, there may a buy-back grace period afforded the previous owner that allows them to buy the home back for the amount the home sold for. And they can do this for as little as a few days after the sale to as much as 1 year or more depending upon the state involved. Here in California there is no redemption period, so once the gavel falls the sale is final, and the previous owner’s can not redeem the property without buying it from the new purchaser. But again, the lien holders may remain unchanged and may still need to be paid off.
7. Sometimes you get a whole lot more than you bargained for (and I don’t mean in a good way).
The previous owners or tenants could still be living in the home. There could be squatters or derelicts that have moved in if the home was vacant for any length of time. And you as the new owner now have to get them out. They will need to be evicted, which will take additional time, cause you additional expense at the very least and could put you in danger if you decide to do this yourself.
You will also now be responsible for removing any debris, clearing out the trash or handling any other disgusting thing that was left behind by the previous inhabitants. Depending upon the value of any items left behind, you may also be required to store them for the previous tenant for their later reclamation. Yes, you can charge them a storage fee, but it may not cover the hassle involved.
8. The rules about disclosure do not apply.
The previous owner’s are under no obligation to tell you anything about the home. And since the property is being sold by the court and not by the homeowner or with the help of a licensed Realtor®, they are under no obligation to tell you anything beyond the basic legal identifying information.
A property being sold in any manner other than by foreclosure sale is subject to disclosure rules and regulations. And a licensed Realtor® is under legal obligation to fill out their own disclosure information and share any material facts about they property that they know.
9. You have virtually no recourse if things go sideways.
Also, with a limited amount of time to do any discovery about the property prior to the sale you could miss finding out something that could make a future resale difficult if not impossible to accomplish. The property could have been used as a drug lab. The property may have been the scene of a death or a murder and this could be a problem for a future buyer. The property could be a breeding ground for toxic molds
Also, if the home has any history as a drug manufacture or sale site, you could find yourself with some very undesirable folks arriving on your doorstep for months if not years to come.
So, now you know more about the pitfalls of buying a home in a foreclosure sale, especially if you are a first-time buyer. Here are some additional resources that I found interesting and which may help you too.
This article appeared on MSN.Money entitled “The Safest Way To Buy Foreclosures”
This article from BusinessWeek.Online talks about “Foreclosures Filthy Secrets”
This article from About.com talks about “The Drawbacks To Buying Foreclosures”
Here’s what CNNMoney.com had to offer on the topic “Foreclosure Sales: Hit or Myth”
Here is some information presented by HUD on “Pre-
Foreclosure Sales Frequently Asked Questions”
And finally here is the information I found on the different rules and regulations for various states including California on InnoVests Foreclosureforum.com “Foreclosure Basics - By State”
I hope you found this interesting and informative. I will talk about short sales in a future post.
Take care & have a super day!
Topics: Real Estate Ramblings, Buying and Selling Tips |
Enjoy this post? Subscribe to my feed or get updates via e-mail
June 21st, 2007 at 6:27 pm
Tisza, I showed a 500K REO property last year where some one had removed all the interior wiring, used something to make holes between every stud, flooded an upstairs bedroom, collapsing the kitchen ceiling. Truely amazing what happens after the Sheriff auction.
June 22nd, 2007 at 2:05 am
Hi Gary,
Wow, now that is what I would call a fixer upper. Did you get the 500K? LOL. Oh, and I shall take your advice and go back and bold the points to make them easier to read. Thanks for the suggestion.
Take care,
Tisza