When I work with first time home buyers, they will often ask to see Foreclosure properties or rehab properties because they “don’t mind doing a little carpet and paint”. Buyers know that they might get more for their money if they buy a home that has been acquired by a bank or simply needs some TLC. Most of these homes are offered “AS IS” and depending on the type of loan the buyer has secured, may not be approved for a home loan. A bank may not see it as a good risk to loan money on a home that needs work. Often these homes are purchased with cash by an individual or investor who has the ability, manpower and cash reserves to fix them up.
Buying a foreclosed property can be a good idea if you’ve done your homework. Make sure you know what the house would be worth in good condition. If possible, find out if any insurance claims have been made on the property. Your insurance agent may be able to help. Have inspections done by a reputable inspector. (Ask me for my referrals, I recommend only the best!) Read your contract and know how much time you have to “review and inspect” the property before accepting the property in it’s condition. Remember, the actual price you are paying is the price of the property PLUS any and all repairs needed. Sometimes, that is more than the property is worth.
Tips for buying a foreclosure house
If you think you may be interested in purchasing a foreclosure, keep these things in mind:
- Buying a foreclosed home requires strong financial wherewithal. Don’t expect to get a 100% loan on an as-is property. Lenders know you will need to have cash to repair and update a home.
- Lenders will not loan on a home that won’t pass appraisal requirements. Stairway doesn’t have a handrail? Electrical panel not up to code? Roof has a leak? Forget about getting a loan without a significant down payment and most likely a track record of rehabilitating old homes.
- Do not underestimate the time it takes to rehabilitate a foreclosure home. Even if you do the work yourself, it takes time to do the repairs, and time is money – as in all the time it takes to do the repairs, you have to make your monthly loan payments and keep utilities on. And insurance. And taxes. If you’re flipping the house, carrying costs can eat up profit quickly.
- Make sure you are able to perform inspections as part of any purchase contract. Even if they seller will not agree to repairs, at least you can have a qualified inspector review the home and provide you with feedback on what they find, and you can then decide whether to proceed with the purchase or not.
- Be aware that sometimes there are hidden “gotcha’s” when purchasing a foreclosed house that even a good home inspector can’t uncover, which can cost big money to repair. These homes have often lacked regular maintenance. Tenants may have moved out and the seller has no idea what problems may exist with the home.
Buying a foreclosed home can be financially rewarding, but is fraught with risk. The higher the reward, generally the higher the risk. Make sure you are comfortable with that risk and have the financial ability to deal with a “worst case scenario” before making an offer on a foreclosure. There is money to be made, but there is also money to be lost. Choose wisely.