There are many buyers, perhaps like yourself, that are looking to foreclosures as a good deal, a way to get a lower price on a home that you can put work into to gain equity. If this describes you, read on.
Buying a foreclosed property means that you are purchasing a property that has been taken back by a bank. You can read how a home gets foreclosed in this post. Once the bank takes the home back, they usually want to dispose of it (sell it) on a “timely basis.” The definition of “timely basis” can be left to your imagination. Some banks will put the home up for sale within a week. Others will take 6 months.
Now that it is for sale, what are things you should watch for? And how does the process compare to a traditional seller?
The first thing you should know is that the current market place for foreclosed homes is extremely tight, as of October 2012. There is an extremely short supply of foreclosed homes, making them in high demand, with many of them selling in multiple offers within a week or so. It is not uncommon to run into other buyers at your showing. Recently I placed an offer on a home for a buyer, and it had 25 offers on it.
Once you get past the shock of multiple offers, making an offer on a foreclosed home involves more paperwork. The standard purchase agreement, being about 15 pages, will have a bank addendum added to it. This addendum can be 15 pages to 30 or more pages. It includes things like: Inspections, Repairs, Condition of property, mold statements, certificate of occupancy, waivers, representations and warranties, etc. They are basically trying to waive all of their liabilities once the property closes. If you want to purchase a foreclosure, this document is required. If you are unsure that you want to agree to all these terms, the perhaps you shouldn’t look at foreclosed homes.
There are a number of banks that state they will look at owner occupant offers for the first 14 days, and will not look at any offers until at least 3 days. This is very common. If you are an investor, you’ll have to wait the 14 days or so until you can place an offer on the home.
Getting a response to an offer can take 2-5 days instead of the usual 1 day with a traditional seller. Although it can take a bank 2-5 days to respond to your offer, they can allow a closing within the usual 4-6 weeks, sooner if you are a cash buyer. It is very common to have an offer submitted and have to wait 2 to 5 days to hear back from the bank. Keep in mind that during this period, other people can also place offers on the home.
Often times a bank will say that if you use the bank’s title company, they will pay for an Owners Insurance Policy. That could mean an instant savings of $500 – $700 or more, depending on the price of the home. That is a great savings! But is it worth it to use the bank’s title company? That’s a great question, one that I get all the time. The first thing I need to say is that I am not a title insurance salesperson. I can make some general recommendations, but I cannot sell title insurance. The best answer I have is this: if you are concerned about title insurance policies and how they differ, you should call up some title insurance companies and find out what the differences are. I can point you to some local title companies. Differences that are common include deductibles, building permit violations, special coverage issues, and the like.
Also another part of choosing a title company is the Closer, which is the person that will perform the closing on your new home. A good closer is highly important as there are many things that can (and do) go wrong with closings, especially with foreclosures (or short sales). I have several closers that have 10, 20, or even 30+ years of closing experience. Trust me, it makes a difference.
Part of the Bank Addendum covers condition of the property. More specifically, most banks will allow you to do an inspection, but state that it is for your information only, as well as to help you determine if you want to back out of the contract. With banks, most won’t want to hear about problems the inspector found, and what you are asking them to fix before closing, or adjust the price due to inspection issues. Most banks won’t do it. Some will. It is usually spelled out in the Bank Addendum whether or not they will or won’t do any work. They also waive the warranty that things will be functional at the time of closing. But none of this is related to “As-Is.”
As-Is relates to after closing. As I mentioned above, the bank is trying to limit their liability for the property once it closes. Large parts of the Bank Addendum state that if anything comes up after the closing, it’s your problem. I’m not sure where the misnomer for “as-is” came about, but many people think it includes the inspection time period.
One of the most troublesome aspects of buying a foreclosed home is that many of the traditional financing products won’t work on a foreclosed home. This is because of the condition of the home. Many times in foreclosed homes, I’ll see broken windows, bare live wires, missing kitchen appliances, missing copper plumbing, holes in walls and doors, and much more. These issues will usually be a problem when trying to get a FHA loan or a conventional mortgage.
So what kinds of financing work on foreclosed homes? Cash, FHA203K, and Homepath Renovation financing.
Cash is easy and it works. The bank will always appreciate a cash offer more than a financed offer.
FHA 203K and Homepath Renovation financing take more time. FHA 203K typically runs 8-10 weeks for the process itself. This is because you (as the buyer) is required to get 3 contractors to bid out the work and get the bids into the loan officer. These bids are used to estimate the amount needed above and beyond the purchase price. This product also has a slightly higher interest rate than the typical mortgage product. This is to cover some inherent risk with having repairs needed.
Homepath renovation financing is usually a bit easier because the bank has already done some of the work up front and know what the minimum repairs are. They will usually already have a document detailing the repairs needed.
If none of the above scares you away, you should be looking at foreclosures. They are priced lower than the traditional sellers, but that’s usually due to condition and stigma. They can be a great deal, if you have the stomach to work around the issues above.