In an effort to get a “cheaper” home, many buyers want to engage in purchasing a foreclosure. But there are some caveats to be made aware of.
Here is a list of 10 issues that one should be mindful of before looking into a foreclosure purchase.
- Condition-Most of the time a foreclosure has been vacant for a long time or has been vandalized by the past owners. The electric is usually turned off, meaning sump pumps may not have worked for some time. The water has also been shut off, making it difficult to know if the plumbing is in working order. The bank or HUD or whomever now has procession of the home will not warrant the condition and usually will not fix anything prior to closing.
- Inspections-A new buyer MAY be able to make the purchase contingent on inspections, but again the seller/owner probably won’t fix anything. Also, the new buyer is responsible for turning on the utilities for the inspections. This means paying to have the electric and water on for a day. If the home has been winterized, a plumber must de-winterize it prior to inspections. A buyer usually has one week to do the inspections, making it a bit of a time constraint.
- Costs-The buyer is usually responsible for MORE costs than usual with a foreclosure. Often the owner/seller will not pay their half of the transfer taxes or settlement fees. They may not pay for the buyer agent’s commission. This may add a few thousand more to the cash needed at closing to a buyer.
- Timing-Answers may not be quick, as everything must go through HUD or the bank that now has possession. It is defiantly not as personal as a typical sale.
- Price-A foreclosure is typically priced lower than what the value is. BUT this does not mean a buyer will get the home at that low price. Often there is a bidding war, driving up the price. Also, the bank may set a reserve amount. This means even the highest bidder may not get the home, if the “reserve” amount is not met.
- Offers-Often the offer process is an online auction. One submits an offer and waits. In some cases, you cannot see the other offers and must wait until the bidding time period is over.
- Contingencies-Have a home to sell first? Chances are the bank will not accept a contingent offer on another home selling first.
- Government Backed Loans-Although not impossible, foreclosures often are not in the condition that will meet FHA and USDA guidelines. And remember from item 1, the owner most likely will not fix items that need addressed. The best option is to be a conventional loan or cash buyer.
- Title-Since a home is already in foreclosure, one can also assume some lienable[LN1] items may exist. If the mortgage wasn’t paid, neither were the taxes. Back taxes, water liens, judgments, etc. can stay with the home. If there are liens, a buyer obtaining a loan cannot get title insurance, which is necessary for any mortgage loan. Therefore, if one is getting a mortgage, all liens must be taken care of before or at closing.
- Competition-Investors and cash buyers are going to go crazy if the home is priced low enough and they can flip the home and resale it down the road. Those with financial contingencies may be at a disadvantage. The good news is that there is often a period where the home is listed first for owner occupants to submit offers. If the bank does not get what they are looking for, they will open it up for investors and government agencies.
These are all generalizations and every case is different.
*Informational purposes only and to be conceived as mortgage or legal information