Foreclosures, a Deep Rabbit Hole
One of the most common questions I get asked by buyers, especially first-time buyers, is “what about looking at foreclosures?” Flippers and investors are not who this post is for. I want to clarify that I’m directing this toward those people who DO NOT have lengthy experience gutting and renovating homes. Investing in foreclosures can work well for those who have the knowledge, know-how, and financial capabilities. But for the average home buyer, I do NOT recommend looking at foreclosures.
And here is why…
First, 95% of foreclosures are in a state of disrepair. This requires extensive renovation which can cost thousands, if not tens of thousands of dollars for the buyer. Typically, foreclosures are bought by investors that can pay in cash, or at least put a minimum of 20-25% down on a conventional loan. As a result, if a house’s condition cannot pass appraisal inspection, it will not qualify for a loan. Which means the only way it can be bought is with cash.
Second, many foreclosures may not qualify for an FHA or VA loan due to the fact that the homeowners who walk away from their homes cannot afford to make their house payments. Therefore, they likely cannot afford to do general maintenance on their home. Deferred maintenance is the quickest way for a property to fall into severe disrepair. The cost of repairs can add up very quickly, and this could mean huge out-of-pocket expense for the buyer.
Furthermore, expect to compete with sometimes 5 or 10 other investors looking for a deal, willing to make cash offers. You may be losing out on other great move-in-ready homes as the only competitor if you act quickly!
Most home buyers need to get a loan. There are 3 main types of loans that buyers get: FHA, VA, or Conventional. There are a couple others out there, such as the Native American loan – a great option if you are registered with a tribe. The FHA 203k Renovation Loan can be another great option for people with experience in extensive property rehabbing. However, it is not as great as it sounds for a first–time buyer. There are stipulations that require all remodel work to be completed within 90 days of closing. Additionally, the buyer must be able to qualify for the final loan amount. Finally, FHA requires that a licensed, approved professional do the remodel work. Buyers are not allowed to do the work themselves.
The Waiting Game…
As a result, buying a foreclosure can take anywhere from 2-18 months. It will usually require the buyer to pay for an inspection prior to submitting a contract. There is a possibility of the deal falling through half-way into the process (or right before closing) due to the bank changing their decision to sell.
Here’s a link to read more about the FHA 203k Renovation Loan: http://www.bankrate.com/finance/mortgages/mortgages-pay-home-renovations-1.aspx