How to Buy a Foreclosed Home
For most people, buying a house is the largest purchase they will ever make. But the potential payoff is huge: a home of your own, a place for your children to grow up and – barring a rare major market reversal – a good long-term investment.
One way to help ensure you get the most house for your money is to buy a foreclosed home. The housing market has been glutted with foreclosed properties because of the recession that started in late 2007, and many of the houses present discounted opportunities for savvy buyers.
Shelley Bridge, a real estate agent with Re/Max of Cherry Creek, in Denver, Colorado, has helped about a dozen clients buy foreclosed homes. Foreclosures can be trickier than traditional home purchases, but Bridge said they worked out well for the people she represented.
Bridge’s clients weren’t investors hoping to make money by flipping, or cleaning up and reselling the properties.
“They were people who had been waiting to move up or move on and buy something anyway, and it just happened to be that there was something out there that fit their criteria,” she said. “Most of (the sales) were an adventure that worked out fine."
The Basics
People typically buy foreclosed homes directly from the lender, though some are sold at auction.
The process for buying a foreclosed home from the lender should start the same way it does buying any home, said Walter Molony, spokesman for the National Association of Realtors: Find a knowledgeable real estate agent.
"I think the buyer of a foreclosure must have a buyer’s agent," said Roxane Webster, a real estate agent and buyer broker with Keller Williams Realty in Greenwood Village, Colorado. "The listing agent is working for the bank. I would not go to the listing agent because the bank is selling a property they’ve never seen that could have title issues and condition issues. When you’re buying a dicey product, you need an advocate in your corner."
Some agents have special training to work with foreclosed properties. For example, the National Association of Realtors offers short sale and foreclosure certification. (A short sale occurs in lieu of a foreclosure, when the lender allows a homeowner behind on payments to sell her house for less than the loan balance.) Bridge is a certified distressed property expert, gaining her certification through a program run by the Charfen Institute, which provides training for real estate professionals.
But certification isn’t mandatory. With foreclosures averaging one out of every five home sales nationwide since the start of the Great Recession, “there are very few agents that do not have experience with it,” Molony said.
Seeing the House
The vast majority of foreclosed houses will be vacant, said Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington, D.C. That usually makes it easy to tour the house and hire an expert to see what work is needed to bring it up to your standards.
“As with any sale, make any contract offer contingent on satisfactory home inspection,” Molony advised. “That way you’re going in eyes wide open.”
This can be particularly important with a foreclosure. Because the homeowner has been unable to make payments and the process of foreclosure is usually lengthy, it’s likely that he hasn’t maintained the home.
“It’s not unusual to see the house in rundown condition,” Molony noted. "It could be real cheap, but it might cost you a fortune to fix up."
Occasionally the house you’re buying won’t be vacant.
"Sometimes the property could still be occupied and the owner (or) renter probably isn’t too happy about leaving,” said Tyrone Adams, director of communications and events for the Colorado Association of Realtors. The occupants might have to be evicted, which could take time. “Then you have to hope when they leave they don’t destroy the house,” Adams said.
In many cases, even if you can get an inspection, you won't be able to to ask that improvements be made before you close the deal. Foreclosed houses often are sold "as is." But an inspection still is worth it, "so even if you’re buying as is, you know what you’re getting into," said Steve Morgan, general counsel for the Colorado Association of Realtors.
“Part of risk-taking is getting a good deal or you wouldn’t do it,” said Donnelly, a vice president at SunTrust Mortgage. “But there is an extra level of risk.”
