The process is highly impersonal
With a foreclosure, you’re not buying the house directly from the person who lived there. You’re buying it from the bank that foreclosed on the previous owner. And in the bank’s mind, the property is simply an asset it needs to get off its books. The bank doesn’t see it as a place to live or where someone raised a family or even where you’ll potentially raise a family and make memories.
Because you’re dealing with a bank, not an individual homeowner, be prepared to wait for a few days, if not weeks, for a response. Don’t think about writing a cute note or introducing yourself directly or through your real estate agent. For the most part, the bank’s agent doesn’t even show the contract, the pre-approval letter or any of the offer pieces to the bank. Instead, the bank’s agent inputs the data into a website or piece of software. The asset manager — the bank’s seller of the property, in other words — simply sees the bottom line number. For the bank, it’s just a numbers game. Are you getting the sense that this will be a highly impersonal process?
Don’t expect disclosures
REO stands for “real estate owned.” An REO property is one owned by a bank after going through the foreclosure process.
In an REO sale, there aren’t any disclosures. You won’t have any knowledge of the previous seller’s experience. If there’s not a seller on hand to answer questions about the home and the neighborhood, you’re going into the foreclosure sale blindly. So it’s important to do the most due diligence possible. This may require going to the city’s building department to check past permits and records and to double- and triple-check the preliminary title report.
Bottom line: Work with your buyer’s agent to learn as much as possible about the home and the neighborhood. If the property sold in the past five years, your agent may be able to obtain past disclosures.
Prepare to see homes stripped bare
A multi-million dollar home was once foreclosed on in San Francisco’s Castro neighborhood. Before the seller left, he removed every appliance and expensive light fixture as well as the majority of faucets.
Some homeowners may have struggled to keep the property or even attempted to sell as a short sale, but the bank wouldn’t cooperate. The homeowner may have hard feelings toward the bank and therefore might felt justified damaging the property before leaving. Ultimately, this will hurt the home’s value. You, as the buyer, will be responsible for any fixes. And you should account for any missing fixtures and features in your initial offer.
Don’t expect the bank to give you credits or fix things
Your offer and the likely discounted list price (discounted from similar comps nearby) should already account for the risk you’re taking on an “as is” property. There won’t be a disclosure about a leaky window or the broken water heater from last year or the outlet in the kitchen that’s not working correctly.
As a buyer, your contract will allow you to have an inspection, so get the biggest and best inspection you can possibly have. If you can get your hands on an old inspection report, review that prior to making your offer.
For example, prior to a home going into foreclosure, the seller had a buyer lined up. The home was to be sold in a short sale. The inspections came up with too many issues, and the buyer walked away. Through the real estate community, the agent representing a potential buyer of the property after it had been foreclosed upon got her hands on the old inspection report. She gave the report to her client, saving him a lot of time and money.
The bank will have its own processes
The bank usually won’t follow any of the norms, processes or mores that are standard in the local real estate community. Instead, the bank will have its own contract that protects its interests. This contract will be followed by dozens of pages protecting the bank from future lawsuits, referring to the sale as “as-is” and putting nearly all the burden on you, the buyer. The bank won’t allow the property to transfer unless it is done this way. In some states, if the bank requires the buyer to use a particular title company, then the bank would be required to pay the buyer’s premium on the title insurance. This could translate into huge savings for the buyer.
To sum up: There are many tempting deals out there among foreclosed homes. You should absolutely consider them — but make sure you’re not getting less than you bargained for.
1. The price is right. The median single-family home price hit its lowest in more than a decade when it reached $154,600 in January, according to the National Association of REALTORS®. That was the lowest since October 2001. During the height of the housing market in July 2006, the median home price for a single-family home was $230,900.
2. It’s cheaper to buy than rent. In nearly every major metro market, it is cheaper to buy a home than rent. Rents have been on the rise the last few years and are predicted to continue to rise. Meanwhile, home affordability is at record highs, which means that buying a home is more within reach to the median income family.
3. Inventories of for-sale homes are shrinking. Ned Davis Research estimates that excess inventories of homes to be eliminated by the end of next year. “When excess supply dries up, people start building more new houses, which has the virtuous effect of reducing the unemployment rate and increasing the economy generally,” according to the USA Today article.
4. Mortgage rates are at record lows. Mortgage rates have hovered near record lows for weeks, which has helped pushing housing affordability higher. For example, the average 30-year fixed-rate mortgage, which is the most popular among home buyers, is 3.59 percent, according to Freddie Mac—just above its record low set on July 26 of 3.49 percent average. “It’s conceivable that at some point in the next 30 years, your interest rate would be less than the rate of inflation,” writes Waggoner for USA Today.
Source: “If You Can Pull it Off, a House is a Smart Investment,” USA Today (Aug. 9, 2012)
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