The economy is recovering and foreclosures are down but certainly not out. Many homes landed on the foreclosure list in the past four years and some are still being added, although not at such a rapid clip. The lure of a foreclosure is, of course, the opportunity to purchase a house at the lowest possible price. But should you buy a foreclosure? Read carefully before committing and be prepared to do a lot of research on these properties.
First, a different question for you. Have you ever owned a home? Experienced homeowners know the ropes of buying, maintaining, and repairing a house. They know the unexpected nature of emergency repairs as well as the seasonal needs of a home. They have gone through buying a home at least once and understand the typical process of selection, offer/counteroffer, and closing paperwork.
Downsides of a Foreclosure
Foreclosures are often poorly maintained, have property title encumbrances, or deliberate damage. If you owned a home before you will already have relationships with repair businesses, utilities, and possibly a lawyer. If you have never been a homeowner, you may find yourself overwhelmed by the extra work a foreclosure requires.
Other challenges of foreclosures include:
- Being unable to have the home inspected because a third party owner will not allow it.
- Eviction of the former owner.
- Liability for back taxes.
- Choice of location is limited.
So Why Buy?
On the other hand, foreclosures have a few good things if you can handle all the rest:
- Lower price because the bank has no need of the property and desires a quick sale.
- You may be compensated for the risk of buying the foreclosure.
- Foreclosure can give you, the buyer, more leverage.
Not all foreclosures will be dumps. In fact, a fair number on the lists right now are probably in pretty good shape, suffering only from being too much house for someone else to pay for.
Before House-Hunting, Especially Foreclosures
The steps to deciding whether to buy a home are the same, no matter what you ultimately decide to look for.
You need to have your finances in order to get a mortgage anyway. Understand that a foreclosure may require more ready cash for repairs, to clear the title, or if you buy in an area full of foreclosures, which signals a declining housing market.
You will want to work with experienced professionals while purchasing and repairing this home. You will need a realtor who has handled plenty of foreclosures. You will want an attorney knowledgeable in real estate law. Inspectors and repair people will join the list. And if you are buying this as an investment, you may need to work with another investor you trust.
This brings you to another decision. Will this be your primary home or are you hoping to flip it or rent it out? This makes the financing more complex. And if the repairs are too extensive, your investment may never be recouped. You also risk home prices remaining stagnant, meaning very little return on the home or even putting you under water.
What to Do
Once you have decided on a home there are several steps to take. One is to get the home inspected. You want to know right away if it will be worth the hassle. This means the structural, mechanical, electrical, and other major systems must be looked at by an experience inspector. The results will tell you whether to stay or walk away.
You need to research the home’s history as much as possible. Read the seller’s property disclosure statement if it is available. A foreclosure often will lack this document because there is an exclusion granted third party sellers such as the bank, meaning they are not required to fill on out. This is where that experienced inspector can earn his money.
If the home is in a cold climate and has been vacant, it may have been winterized. This means the water has been turned off and the pipes emptied. The traps may be filled with a form of antifreeze. The utilities will have been turned off as well. Before the inspector can do his job the utilities will have to be turned back on, the pipes pressurized, and an electrician should check the electrical system before anything is turned on or plugged in.
Plumbing should be carefully checked since the worst problem in a foreclosure is a leak from a broken pipe, mold from moisture, and the issue of floor and wall replacement. The rest of the major systems not only must be checked for proper functioning, but the ductwork and chimney checked for small dead animals along with dirt and debris.
Still Up for a Foreclosure?
If you are still up to the extra work a foreclosed property can be then you can reap the rewards of your labor if you are careful and patient. If you can find a foreclosure in good shape, in the right location, and with clear title, you could be making the best investment of your life.