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Pros and Cons of Buying a Foreclosed Home

For consumers who are fortunate enough to have steady income and/or plenty of savings, this recession is an opportunity to go bargain hunting. This is especially true in the real estate sector. The global economic slowdown began with a housing crisis, and it's the languishing housing market that continues to act as a drag on government efforts to bring about a rapid economic recovery. In some parts of the country, homes are selling for less than $20,000 -- so low that one could literally purchase a home on a credit card. In many states, foreclosure rates are at levels not seen in decades.

Money-savvy consumers across the country have been figuring out ways to capitalize on the depressed housing market, from buying cheap vacation spots to purchasing foreclosed homes, fixing them up and converting them into rental properties. Though the current foreclosure crisis presents plenty of opportunity to buy properties for pennies on the dollar, consumers still need to arm themselves with as much information about buying foreclosed homes as possible, because purchasing foreclosed properties is often far from easy.

Here are some of the advantages and disadvantages of buying a foreclosed home.

Advantages:

• Foreclosed homes often go for super-low prices because lenders and homeowners are interested in minimizing losses. Most will end up losing money in the process, but taking a small loss is better than losing everything. This translates to homes selling at prices that are far below their appraised market value. So, the number one advantage: cheap homes!
  
  
• Because the real estate sector is so depressed, and the number of homes in foreclosure is high, consumers have a lot of properties to choose from. If one deal doesn't pan out, a bargain hunter can simply continue shopping for another favorable deal.
  
  
• In many parts of the nation, sliding home values are not expected reverse course any time soon. However, a diligent bargain hunter can often find a foreclosed home at a very reduced price, buy it, and realize immediate equity. Immediate equity -- buying a property at a price that's below the property's appraised value -- is extremely advantageous in any economic environment, and greatly benefits all types of homebuyers, be it the professional real estate investor or the consumer who's buying his or her first home.

Disadvantages:

• Though the national unemployment rate is likely to top 10% in coming months, and the U.S. economy is not likely to return to prosperity any time soon, many Americans made a lot of money during the recent credit/housing boom, and continue to do well today by e.g. investing in recession-friendly stocks, shorting stocks, etc. That translates to competition for high quality properties that are selling at firesale prices, especially in respectable neighborhoods. Homebuyers should assume that they will have to contend with at least some competition for that perfect foreclosed home in that lovely neighborhood, that's selling at a once-in-a-lifetime price.
  
  
• Contrary to what many consumers think, foreclosed properties aren't sold on a first-come, first-served basis. When buying a non-foreclosed home, the buyer can make an offer on a property, and the seller can accept it. When buying a foreclosed home, the buyer typically has to wait for the property to go to auction before he or she can make an offer. The auction setting provides for a far more efficient marketplace, which means that the buyer is somewhat less likely to get the home they want at the price they want.
  
  
• It may be cost-prohibitive to make necessary repairs, especially if the owner lost interest in the home as a result of financial hardship. Some people, when they find out they are about to lose their home, stop caring about the maintenance of the property. Some spiteful homeowners even damage their own property on purpose: a senseless response to the realization that the homeowner is powerless to save his or her home. Moreover, estimating repair costs can be quite difficult, because, in most instances, a homebuyer won't be able to inspect a home before it goes on the auction block.
  
  If a foreclosed home has been unoccupied for an extended period, the house may fall victim to looters who often strip a vacant home of anything and everything that can be sold, including the copper plumbing. A vacant home may also become severely infested with vermin like cockroaches, mice and rats.
  
  
• Even after foreclosure, some homeowners just don't want to let go. Whether the cause is an emotional attachment to a home, or just plain stubbornness, getting a previous owner out of the place can be difficult. Sometimes formal (and very time consuming) eviction proceedings are necessary to wrest the current resident from a home. No one wants to put a family out on the street, but it's important to remember that no matter what you do, the financial institution holding the note is going to use force to evict them eventually.

No matter what kind of home you buy, you need to do as much research as you possibly can. What kind of neighborhood is it in? How are the schools, roads, and general environment? Is the lifestyle in the area a good fit for you? Those are just some of the questions you should be asking yourself.

Homebuyers should also remember that with foreclosure auctions, you don't get to buy a home via a long term, amortized home loan, also known as a mortgage, in most cases. It's cash or a cashiers check. However, if the property in question is owned by a financial institution like a bank -- also known as a real estate owned (REO) property -- a homebuyer may be able to secure financing from the property-owning bank.

If you find that the property you're interested in is owned by a bank, then patience will be your best ally. Negotiating with banks directly can be frustrating. Be prepared to wait for what might seem like an unreasonable amount of time for replies to your offers and other related correspondence.

Also, remember that sometimes the repairs and other expenses involved in buying a foreclosed home can make it almost as expensive as buying a home at full-price, so be prepared to be disciplined about sticking to your budget. And don't make the mistake of paying more than you wanted to because you got caught up in the frenzy of a bidding war. Emotional bidding is a rookie mistake that could end up costing you thousands.

Purchasing a Foreclosure Property

Find A Local Agent: Most well known realtors have at least one agent dedicated to foreclosures and short sales. A dedicated pro will have Short Sale and Foreclosure Resource certification from the National Association of Realtors®.

Cruise On By: Drive through the neighborhoods you like and look for signs that say “Bank Owned,” “REO” or “Foreclosure.” REO, or real-estate owned, means that a bank or government agency is the property owner.

Budget: Whether you intend to live in the home yourself, or you plan on renting or flipping it, assess how much you will need to invest in the property. Issues may range from landscaping and leaky faucets to mold and lead paint. Be realistic when it comes to budgeting and avoid making assumptions like your brother-in-law will paint the bathroom in exchange for a case of beer. Leave a column in your budget entitled “Misc. Unforeseen Expenses” and throw a few thousand dollars in that column. Don't forget to budget for things like utilities, property taxes, homeowners insurance and waste disposal.

Inspection: The average cost of a home inspection is $300 to $600, depending on where the property is located. You'll find that this is money well spent because an experienced home inspector can spot problems that you could easily miss. A reputable inspector should have a long list of items to examine, including the roof, foundation, plumbing, insulation, ventilation, wiring, water heater, furnace, etc. Before hiring anyone, try to get at least three bids from local inspectors, and ask them what they plan on checking.

Bid: With the home inspection and rehab budget done, your next move should be to find an agent and place a bid on the home you want. Find out if the property is being sold to the “highest and best” bidder. Keep in mind that, from the bank's perspective, the "highest" bid isn't always the "best." For instance, you put in a bid of $110,000, but you need to get a home loan, and that'll take about three weeks. If the bank gets another bid for $100,000 cash with a close date that's two weeks away, they may move forward with the lower offer. Needless to say, when purchasing a foreclosed home, cash is king.

Short Sales and Foreclosures: Two Different Animals: Remember that a short sale is not the same as a foreclosure. A short sale is when a mortgage holder (bank, credit union, etc.) lets a homeowner sell a home for less than the amount the homeowner owes on a mortgage. Anyone with experience with short sales and foreclosures will tell you that short sale purchases are invariably more complicated than purchasing a foreclosed property, especially if the short sale in question hasn't been approved by the bank.