Not a week that goes by that I don’t receive one or more calls or e-mails from hopeful buyers and/or investors wanting to buy a bank-owned property (a foreclosure). I always start the conversation with a simple question, “Why do you want to buy a foreclosure?” More often than not I get a version of the following as an answer. “The price. I know foreclosures are a good deal.” As someone who specializes in buyer brokering, I will admit I inwardly cringe a little every time I hear this as I rarely find foreclosures to be the deal most people think they are.
My Experiences With Foreclosed Properties:
I’ve been a full-time real estate broker for twenty years and have been buying and selling real estate for over thirty-five years. I have bought, renovated and sold close to thirty homes on my own and will admit to having learned many things the hard way. Many years of looking at property taught me how to take a realistic view when examining a property, with special attention to what it’s likely to take to repair and/or improve it. I myself have only once purchased a foreclosed property.
From 1990 – 1992 (at the beginning of my professional real estate career) I represented the U.S Department of Housing and Urban Development, Fannie Mae, and banks that listed foreclosed properties for sale in Southern Vermont. After a couple of years I gave up this segment of my business because dealing with the asset managers in charge of the properties was too frustrating. However it did give me an inside view of how asset managers operate, which has been useful in working with buyers who wish to pursue foreclosures.
The Truth About Foreclosed Property:
It is true that, occasionally, there are some real deals to be had with foreclosure sales. However, those deals are few and far between; fewer than people assume. I would go so far as to say that less than 15% of all foreclosure sales are a particularly good deal for buyers. Another 15% are “money pits.” The vast majority, approximately 70% of all foreclosures, are “fair deals” after the buyer finishes all the work the house needs.
Given that the chance of getting a great deal on a foreclosed property is less than two in ten, why do so many buyers (particularly first-time buyers) want to pursue foreclosed property?
Most simply underestimate how much money and time it will to take to make needed repairs to the home. Second, they often receive bad advice from real estate hucksters who sucker them into “How to Make Your Fortune in Real Estate” seminars. Such seminars are not worth what they cost, but I’ll save that topic for another blog post. Finally, many people want foreclosed property because hope springs eternal. Who wouldn’t want to win the “real estate lottery”? Even after someone explains the odds of getting a good deal, most people still want to roll the dice.
What You Need To Know About Foreclosures:
It’s important to understand that buying a foreclosure presents risks that you would not face in non-foreclosure situations. Banks that own property on which they’ve foreclosed are can often times be slow in responding to purchase offers, but once a lender does accept your offer, the pace picks up dramatically. Buyers will typically be pressured to inspect and close ASAP; 30-40 days is the norm. Expect the bank to give you ten days to inspect the property and either walk away or move forward. That means it’s absolutely critical that you and your agent prepare in advance and have an inspector and contractors ready to go on extremely short notice. Additionally, you should be prepared to have to pay to have utilities turned on so your inspector and contractors can determine whether the electrical, plumbing, heating and cooling systems function properly and, if not, what will be necessary to get them operational.
Other Factors To Consider:
If you’re planning to purchase a foreclosed property you should expect to spend roughly 10% more than what you estimate. No matter how talented a contractor is at estimating, it is difficult for a contractor to know exactly what might be discovered when repairs get underway. That’s particularly true if part of the scope of work you’re having done includes the contractors removing siding or sheetrock and find additional problems not seen during their initial inspection. By adding in an extra 10% you avoid any financial surprises and, if the extra money isn’t needed then you’re simply ahead of the game.
Consider your long-term objectives. Are you buying to occupy the home and live there? If so, consider location. Just because the house is cheap does not mean its location will work for you long-term. For example, is it an area where you want to raise children?
Are you buying the property as an investment? If so, who do you envision either renting or purchasing it from you once the work is complete? Will your anticipated end-user find the property appealing or are you miscalculating your target audience?
Are you prepared for the renovation process? Some people really enjoy either doing the work and/or the entire process, while many others find it extremely frustrating and stressful. IF you’re already extremely busy, ask yourself if you’re ready for another project.
These are the types of questions that can and should be explored with an experienced local buyer broker so that if you decide to pursue a foreclosure you do so armed with the information you need to make a well-informed decision.
Finally if your market is a Buyers market (as most are as I write this) then you need to understand there are a lot of Sellers anxious to sell, who may be as or even more motivated than the banks and easier to work with.