You know the old saying, if it seems to good to be true – it probably is. This is very appropriate in buying foreclosure homes. I get calls all the time from people who are searching on the internet who are looking to buy foreclosure homes for very low cost $1, $10k, $20k. Too good to be true right? Usually RIGHT. I don’t blame people, if you look online sometimes it looks that way and if you watch tv either with the news or advertisements, there are all kinds of myths about buying foreclosure homes with no money or at far below market cost, to make lots of money with no money down, no experience, etc. These are merely myths or half truths and rarely if ever are correct. Here are some realities of buying foreclosure homes or buying distressed properties.
Classified online sites: Unfortunately, there are a lot of classified online sites which advertising buying foreclosure homes have become a hot bed of misinformation, scams, etc. Because there are very few requirements or filters, the scam artists have played on the misinformation about buying foreclosure homes to prey on people. Scammers repeatedly try to sell properties they don’t own by pricing them for far below market in online ads and try to get people to give them earnest money. Particularly buying foreclosure homes are often targeted because they are vacant and they can get pictures and information from legitimate online sources. If people do a little homework, they can figure out the scam or misinformation. Look on other internet sites to see if the home is listed and call the information number to double check the price you have. Look on mls feeds, which many realtors have free use of on their websites. And if all else fails, go by the house and see if there is a sign in the yard or window and call. Also, check out the recorder of deeds, public record or ask the person who you talk to for proof of ownership. If they balk, it is probably a scam.
This company tracks statistics and public records of foreclosure homes put into foreclosure by bank court filings. It lists homes that are in foreclosure or preforeclosure on consumer real estate sites. They also allow subscription on their website to lists of foreclosure homes. These foreclosure homes are usually not on the for sale market at the time listed. Sometimes they will not show the address, just street and city/state and a google earth or similar aerial or other street picture. The price they show is not the market value or list price. It is the price owed on the home from the public record or taxes due. Can you buy these foreclosure homes? Many times no. But most of the time, banks must wait at least 9 months to legally get deed to these homes and then it may be longer for them to put them up for sale. Banks often hold foreclosed properties so the market is not flooded, which reduces prices. But make no mistake, when these homes are put on the market, they will reflect market value or slightly less. They are NOT given away for cents on the dollar.
There are some foreclosure or short sale homes that can be offered for sale on auction sites that are legitimate. BUT you need to know what you are getting. First, on the listing, auction properties have a very low opening bid price, somettimes 0 or $1. Will they sell for this even if you are the high bidder – NO. This is an opening bid price, which is usually 15-20% lower than the bank reserve on the property. These are auctioned by reserve only. Banks are not going to take any risk. If the high bid does not meet their reserve, they can reject it or negotiate with you. One clue what they want is to find out the former mls list price of the home or the market value. That will give you a good idea.
Also, auction properties are not traditional sales and are not often for traditional buyers. They usually do not allow any contingencies. So no inspections. No utilities on – so you do not know what is exactly wrong with the home. Many things you can see on a visit to the home, but busted pipes, non functioning heat or ac, electric? Unknown. And with no utilities – it will eliminate most if not all of the possible loans. FHA and VA are out – they require working heat and hot and cold running water. Some conventional loans with 20% or more down allow no utilities, but most conventional loans under 20% require at least running water. And there is no mortgage contingency, which means if you don’t get the loan, you lose your earnest money, which is usually $2500 (more than most traditional sale properties). Finally, the times to close are typically hard and fast 30 day close, which is possible but not typical for most lenders.
Finally, some auctioned properties are NOT vacant. It does indicate but you need to be careful. Some properties will have the former owners or tenants still living there. If you buy it, it would be up to you to legally remove them. Which means you won’t even be able to get into the home to see it. And it also means that loan possibilities will not likely be available unless you are doing 20-25% down.
Not all auction properties require a total gut though and can be a good deal. However, many auction properties have been on the mls and did not sell. That should be a question – why didn’t it sell?
The biggest benefit of auction properties are transparency of the deal. You know the other bids, there are less manipulation and “monkey business” as there can be with buying foreclosure homes during the offer and negotiation stage. Many foreclosure homes go into blind multiple offers or are awarded to people who were not the highest bidder or even have false multiple offers to try to get you to pay more money without negotiation.
Auctions on foreclosure homes can be online or in person. Online is very easy. If you win the bid, they ask you to put down $2,500 or sometimes 3% of the bid as non refundaable earnest money. You will sign an online contract. You can use an attorney and a Realtor, but their is no attorney review contingency and they will not change their contract or make any modifications. You also will pay a buyer’s premium or fees which can be as much as 5% of the high bid. So, you should consider those when you bid.
You can do a buy it now sometimes for the requested amount to purchase the property prebid. The closing is very similar to a traditonal sale. They will usually give a title (not always so check the fine print), they will transfer deed, etc.
Sheriff’s sales on foreclosure homes are where you can buy foreclosure homes for the taxes do on the property or for the lien owed to the bank. This will be far below market. First, buying these foreclosure homes are cash only. You have to be present at the sale to bid and sometimes there are many properties in the same session, so it can take several auctions. Sheriff’s sales are cut and dry. No title, usually no prior visit of the property. There is a transfer of deed (after redemption periods), but no closing. You pay right there and sign the papers plus any transfer fees. You can get your own title and title insurance from a title company. But if you do not, you will not get a clear title and could adopt any open liens on the property. You would need to resolve those (usually pay them off) before you can sell or loan on the property. If they are sold for taxes due, you do not usually take possession or ownership of the property until after the 2 year right of redemption. Or in the case of a loan, for the statutory redemption period. But you need to pay upfront. And again, you may need to eventually legally evict the occupants.
What can you expect from buying a foreclosure home?
First, these are AS IS. You can still do an inspection, AND YOU SHOULD, but the only option you will have is either buy it lumps and all or walk away. Banks and government entities USUALLY will not make repairs to foreclosure homes. SOMETIMES they will, so it is worth an ask, but usually it is rare and only done when it is a matter of loanability. So, you can’t get a loan if this is not done.
Some foreclosure homes will not be loanable by FHA due to condition, some can do conventional and some will not be loanable period. You need to know that before you put an offer it. Consult your loan office and Realtor to see what are the pitfalls.
people with cash – what can you do?
You can buy cash and fix up and do whatever you want with the home, within village code. But be advised that the mass foreclosure and short sale barrage of the last few years has prompted some villages to require point of sale and point of occupancy inspections that require the homes be brought up to code. BUT HERE IS THE KICKER…in these towns you will NOT be able to move into the homes until they are complete, up to code, safe and livable. So you may not be able to live in it and fix up until it is at least in move in ready condition per the village.
There are also resale sites that offer foreclosure or other properties. These can be good deals but are never prime properties. Prime properties are always sold traditionally on the open market. First, this scenario is ripe with scams. You need to check out the companies to ensure they are legitimate. You need to wire them money so you need to know it is legitimate by the better business bureau or calling the attorney general. You also can look out on the internet to see if there is anything posted good or bad about the company. There are a couple of legitimate companies. And you need to ensure they have some authority to sell. Again, they should be able to produce Sometimes you can tour them, sometimes you can’t. Sometimes they will have occupants that need to be legally removed by you – the new buyer. Again, everything is done online. Some deals can be financed through them. Sometimes this can be an option for people who do not have the best credit or who want to fix up a home while they live there. Interest rates are usually high. Again, no clear title, so unless you pay for a title, you do not know about liens. AND sometimes, even the legitimate companies do not have clear deed. They will give you back your earnest if they can not get, but that can take several months.