“Ask Your Mortgage Professional”             February 2010

Foreclosures…Good Deal or Bad Deal?  

Hunting for the foreclosure bargain, how do you know if you are getting a good deal or a bad deal?  While buying a foreclosure can sometimes give you an opportunity to purchase a home for less money there are certainly some risks involved.  Knowing and understanding these risks will help you make an educated decision on which home to buy.   

Pre-Foreclosure 

Working with a Realtor will help you navigate through the purchase process, especially in the first group of “Pre-Foreclosures”.  This is where the homeowners are behind in their payments and they are about to be foreclosed upon.  If the homeowners are honest with their Realtor, they have the best option of selling their home, even if it is a short sale approved by the bank. Many banks are willing to take less for the property, in an effort to avoid the foreclosure process.  If the homeowners are involved it makes the process easier.   This can be a very difficult situation for the homeowners as they face foreclosure.  It can be especially difficult, if the foreclosure is a result of a job loss, or some other unforeseen tragic event in their lives.  Having a third party, the Realtor to work for you can help everything go smoothly in these difficult situations.  Using a Realtor who has experience in short sales will really make a difference in the final outcome for this homeowner.   

Auction 

As part of the foreclosure process the home will be auctioned off on the court house steps, and sold to the highest bidder.  The lender who currently holds the note on the property will definitely be bidding on the property in order to either sell it for the price needed, or be the highest bidder in order to retain the property.  Then the lender has the opportunity to sell it later for the price they feel the property is worth.  While this is viewed as the most risky way to purchase foreclosed properties, it can also have the most potential for profit if the price is right.   You need to be aware of several potential serious consequences.  If you are unfamiliar with the process you can end up with a home that is inhabitable, un-financeable, and you may even over pay for the property.  Inspect the property before the auction if this is possible.  Be sure that you are pre-approved to purchase the home and have the financing details worked out.  Make sure your lender knows the condition of the property, and what type of loan you are getting.   You may qualify as the borrower but the property may not. Auctions are final; you will not get your deposit back. You may have to consider getting a construction loan if the home will not meet lending guidelines for government or conventional financing.  Make sure you will be able to get a clear title, with no clouds that will hinder you from financing.  Verify that the taxes are paid up to date and not in arrears, or you will have to pay them as well.  Estimate all repair costs.  In this situation, you need to count the total costs involved, not just the auction sales price.  

REO-Real Estate Owned 

These are bank owned properties.  An REO occurs when the lender is the top bidder at the foreclosure auction and they gain possession of the property.  The lender is now in the position to sell the property in order to recoup their losses.  The lender will ensure that you have a clear title to purchase this property, this includes making sure the taxes are current.  In some cases the lender may even make some minor repairs to the property to ensure they are able to sell it.  However, all foreclosures sales are sold “AS IS”. There is no warranty expressed or implied by either the lender, the Realtor, or any other party involved in the sale of the foreclosure.  While this is the most common method of purchasing a foreclosure it still has some risk involved.  Do your homework.  Work with a Realtor who has experience with foreclosed properties and ask them to research the homes history (no previous meth labs, flood damage, mold, defective drywall etc.).   If work is needed get bids for the repairs, so you know the total cost of making your house a home.  Read the contract carefully.  Knows what the seller expects from you and what to expect from the seller when purchasing a foreclosed home.  Negotiating the contract with the bank is different than negotiating with an individual homeowner.   

If you have questions or comments please email them to andrew@askandrewconner.com  

Call Andrew today at 573-302-0600.   

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