How to Buy a Foreclosed Home
Buying a foreclosure can save you a lot of money, but the journey is fraught with peril.
By Chris Kissell, Contributor | June 11, 2018, at 10:45 a.m.
Visit the house and perform a “curbside inspection” of your own. (Getty Images)
As home prices soar in many cities, buyers might look to foreclosures as an affordable option for landing their dream home. Typically, a foreclosure occurs when a homeowner no longer can make the mortgage payments and the lender seizes the property. The lender then requires the former owner to vacate the property before offering it for sale, usually at a discounted price. In some cases, the home is auctioned off to the highest bidder.
Foreclosures offer home shoppers the potential to score a great deal, says Elizabeth Mendenhall, a Realtor in Columbia, Missouri, who is president of the National Association of Realtors.
“Sometimes people think a foreclosure only happens to the lower end of the market, but you can definitely find foreclosures at any price range,” she says.
But while buying a foreclosure can save you a lot of cash, it does come with risks. If you pursue a foreclosure, it helps to have a “stomach of steel,” says David Reiss, law professor and academic programs director of the Center for Urban Business Entrepreneurship at Brooklyn Law School.
“There’s going to be a lot more ups and downs” than in a typical homebuying process, says Reiss, whose work focuses on real estate finance and community development.
Why Buy a Foreclosure?
In recent years, foreclosure sales have been trending downward, according to national property data curating company Attom Data Solutions. That is largely because a strengthening U.S. economy has reduced the number of borrowers who lose their homes as a result of failing to pay the mortgage. In 2017, distressed home sales – including foreclosures and short sales – made up 14 percent of all U.S. single family home and condo sales, according to Attom Data Solutions. That number was down from 15.5 percent in 2016 and a recent high of 38.6 percent in 2011.
Still, some buyers look to foreclosures to get the best possible deal. Homes may be for sale in various states of foreclosure. For example, pre-foreclosure is a period when the owner has fallen behind on payments, but the lender has not actually taken the home from the owner. Homes sold at this point often go through the short sale process, where the lender agrees to accept an amount of money from the buyer that is less than what the current owner owes on the mortgage.
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Properties that are already in foreclosure are sold at an online or offline auction, or by a real estate agent. The biggest lure of buying a foreclosure is the potential savings you get compared with buying a similar nondistressed property.
“It can be like a 15 percent discount on your neighboring houses,” Reiss says. “So, it can be significant.”
But Mendenhall says how much you will save depends on the local real estate market and the stage of foreclosure of the property.
The Risks of Buying a Foreclosure
Purchasing a foreclosure involves several substantial risks, so buyers must enter the process with their eyes wide open. In many cases, if you buy a foreclosure at auction, you must purchase the property sight unseen. Reiss says this is the biggest potential danger of buying a foreclosure.
“The big, scary thing is that with a number of foreclosures, you can’t actually inspect the property before you actually bid,” he says. “That’s in part why the prices are below the market.”
Even if you can get a professional inspection on a foreclosure, you typically have to buy the house “as is.” Once you purchase the home, any problems that pop up are yours – as is the responsibility for finding and paying for a remedy. Such problems are more likely in a foreclosure than in a nondistressed property. For example, in some cases, a frustrated family might strip the home of valuable elements before vacating the house.
“Or they kind of just beat it up because they were angry about having to go through the foreclosure,” Reiss says.
The mere fact that the home is vacant also can lead to problems. Reiss says a home is like a plant – if you don’t tend to it regularly, it can wither and die. “If you happen to leave it alone on its own for too long, water leaks in, pipes can burst, rodents can get in, just the elements can do damage,” he says.
Mendenhall adds that people who lose their homes to foreclosure typically have major financial troubles. That can trigger other troubles for the new owner. “If the previous owner was in financial distress, there’s a chance that there’s more maintenance and work maybe that they haven’t completed,” she says.
Reducing the Dangers of Buying a Foreclosure
There are a few things you can do to mitigate the risks associated with buying a foreclosure. For starters, see if you can get a professional inspection of the property. Although buyers often cannot inspect a foreclosure property, that is not always the case. So, be sure to ask a real estate agent or the seller about hiring a home inspector.
“Even though it may extend the process, if you can have a qualified inspector come in, you can know a little bit more about what you’re getting into,” Mendenhall says.
If you can’t inspect the property, Reiss recommends researching its history. Look at publicly available records to find out when the property was last sold and how long the current owner had possession. Also, check whether building permits were drawn and what type of work was done. “Maybe you’ll see some good news, like a boiler was replaced two years ago,” Reiss says. “Or maybe you’ll see some scary news, like there’s all these permits and you don’t know if the work was completed.”
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Also, visit the house and perform a “curbside inspection” of your own, Reiss says. “Even if you can’t go inside the house, you want to look at the property,” he says. “If you can peek in the windows, you probably want to peek in the windows.”
Knock on the doors of nearby neighbors. Tell them you want to bid on the property but need to learn all that you can about the previous owners, including how long they lived in the home and whether they took care of it. And ask if there have been any signs of squatters or recent break-ins.
“Try to get all that information,” Reiss says. “Neighbors are probably going to have a good sense of a lot of that, and I think that kind of informal due diligence can be helpful.”
Working with a real estate agent experienced in selling distressed property may help you avoid some of the potential pitfalls of buying foreclosures, Mendenhall says. Some agents have earned the National Association of Realtors’ Short Sales and Foreclosure Resource Certification, or SFR. Such Realtors can help guide you through processes unique to purchasing distressed properties, Mendenhall says.
How to Find a Foreclosure
You can find foreclosures by searching the listings at bank websites, including those of giants such as Wells Fargo and Bank of America. The government-sponsored companies Fannie Mae and Freddie Mac also have listings on their websites.
The federal government’s Department of Housing and Urban Development owns and sells foreclosed homes. You can find listings on the website.
Private companies such as RealtyTrac offer foreclosure listings online, typically for a fee. Finally, you can contact a real estate agent who will find foreclosures for you. These agents may help you find foreclosures before others snatch them up.
Is a Foreclosure Right for You?
Before you pursue a foreclosure, Reiss encourages you to ask yourself whether you are in a good position to take on the risk – and, hopefully, to reap the reward – of buying a foreclosure. It is possible to use conventional financing, or even a loan from the Federal Housing Administration or Department of Veterans Affairs, to buy a foreclosure. However, people with deeper pockets are often better candidates for buying a foreclosure.
Because the process can be highly competitive, buyers with access to large amounts of cash can swoop in and land the best deals. “You can get financing, but you need to get it quickly,” Reiss says. “I think a lot of people who go into purchasing foreclosure(s) want to have the cash to just kind of act.”
Sellers of distressed properties love cash-only buyers, because the home can be sold without a lender requiring either a home appraisal or a home inspection. “So, the more cash you have on hand, the more likely you’re playing in those sandboxes,” Reiss says.
In addition, buyers of foreclosures often need to spend money to bring a property up to code or to make it competitive with other homes in the neighborhood. “Have a big cushion in case the building is in much worse condition than you expected,” Reiss says.
He cites the example of someone who buys a foreclosure, only to discover that the piping has been stripped out of the basement and will cost $10,000 to repair and replace. “You need to know that you can handle that one way or the other,” Reiss says.
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People with solid home maintenance and repair skills also are good candidates for buying a foreclosure. “I think if you’re a handy person, you might be able to address a lot of the issues yourself,” Reiss says. He describes such buyers as anyone who has “a can-do attitude and is looking to trade sweat equity for home equity.”
Reiss and Mendenhall agree that flexibility is crucial to successfully shopping for and purchasing a foreclosure. Mendenhall notes that a foreclosure sale can take a long time to complete. “It can be a long process, or a frustrating one,” she says. “It can depend upon where they are in the foreclosure process. It can take a much longer time to go from contract to close.”
For that reason, a foreclosure might not make sense for buyers who need to move into a property quickly, she says. Also, think hard about how you really feel about buying a house that needs extensive renovation work that might take a long time to complete.
“It can be hard for some people to live in a property and do repairs at the same time,” Mendenhall says.
After You Buy a Foreclosure
After you purchase a foreclosure, don’t simply assume that buying the property at a discount automatically puts you on the path to real estate riches. To get the most value from your property, you might need to do some repair work.
“It’s not just going to appreciate on its own,” Mendenhall says. “It certainly will appreciate, but it’s going to appreciate with the market or the repairs.”
Upgrading the kitchen or replacing windows typically provides more of a return on your investment than some other types of work.
“If someone buys a house and they unfortunately do the wrong type of fixing up, it might not bring as much of an investment return as they thought,” she says.
Once you choose the right repairs and execute them well, you might improve the property’s value and achieve another more civic-minded goal.
“If you’re willing to do a little work and fix it up a little bit, you can kind of improve that neighborhood,” Mendenhall says.
Don’t expect a big return on most home improvement investments.
When setting out to improve your home, you’re usually motivated by making the space more comfortable for your family. You justify the expense by saying that the project will inevitably add value to your home. But most home improvements don’t add as much value to your home as you spend on the project, at least if you’re going to sell soon. Remodeling magazine’s 2017 Cost vs. Value report, which analyzed 29 projects in 99 U.S. markets, found the only improvement that added more value than it cost, using a national average, was adding insulation to the attic. Smaller, less expensive projects like adding a new steel door tended to bring a better rate of return than large, high-priced projects like a master suite addition.
ROI varies by project and location.
Exactly which renovations will add value depends on where you live – not just your city or region but your neighborhood. Installing a feature that people in your neighborhood expect (and need) is more likely to pay off than adding high-end features not found in most other homes. And adding square footage to a small home in a neighborhood of larger homes is more likely to pay dividends than making your home the largest in the neighborhood. The Cost vs. Value report also estimates costs on the high end, so in some cases a more modest version of projects may yield as much or more value than going all out.
Adding an in-ground pool.
The average cost for homeowners to add a pool was $41,975, according to reports by HomeAdvisor.com customers. In most markets, you’re unlikely to be adding nearly that much to your home’s value. While a pool is more likely to be prized in an area where the weather is warm and most nearby homes have pools, even in those neighborhoods it typically doesn’t boost the value anywhere near what it cost to install it. The Cost vs. Value report does not include pools.
Gourmet kitchen renovation
Redoing your kitchen with high-end finishes and professional appliances might look great, but it won’t yield nearly what you spent when you go to sell. According to the Cost vs. Value report, a major kitchen remodel added 65.3 percent of its $62,158 cost to a midrange home and 61.9 percent of its $122,991 cost to an upscale home. A minor kitchen remodeling project – replacing some appliances, laminate countertops and cabinet doors – had a much better return on investment, returning 80.2 percent of its cost in value to a midrange home.
Patio or deck
You might think that adding a patio would significantly boost a home’s value. But the Cost vs. Value report calculated that adding a 20-by-20-foot flagstone patio, with new sliding-glass doors, a fire pit, pergola and outdoor kitchen, would return only 54.9 percent of its $51,985 cost for a midrange home. A more modest 16-by-20-foot deck addition fared better, returning 65.2 percent of the $17,249 cost of a composite deck and 71.5 percent of the cost of a $10,707 wood deck, both for a midrange house.
Master suite addition
In general, it’s hard to get your money back from an addition because the project is so costly. Remodeling magazine estimates the cost of a midrange master bedroom addition at $119,533 and predicts that it will add only $77,506 to the home’s value, or 64.8 percent of its cost. On an upscale home, the project would return 59.9 percent of its $250,687 cost.
Adding a bathroom.
Another bathroom would really increase your home’s value, right? Well, the Cost vs. Value report found that a bathroom addition added only 64.8 percent of its $43,232 cost to a midrange home and 57.1 percent of its $81,515 cost to an upscale home. Adding a bathroom within your home’s existing footprint, which has a much lower cost, is likely to yield more value versus its cost, especially if you’re adding a second bathroom to a one-bath house.
Installing new windows.
Many homeowners mistakenly believe that installing new windows will cut costs for heating and air conditioning, but it usually takes many years to get back the cost in energy savings. While new windows may improve your home’s look and feel with more natural lighting, they rarely add as much value as they cost. A 2015 survey by the National Association of Realtors estimated that installing new vinyl windows would recoup 80 percent of the $15,000 cost when the home sells, but only installing wood windows would reap 58 percent of the $26,000 cost. Remodeling magazine’s Cost vs. Value report estimated that new windows would regain about 70 percent of their cost in an upscale home, whether the windows were wood or vinyl.
Chris Kissell began writing for U.S. News in 2017. He has almost three decades of experience as a journalist, covering everything from religion and tech to health and personal finance.
In the past, he has worked as an editor at NBCUniversal, national night editor at Internet Broadcasting Systems, senior editor at Bankrate and senior managing editor at QuinStreet. He is currently president of Words At Work LLC, and provides writing, editing and consulting services to clients across the country.
Born in Minneapolis, Kissell received a bachelor’s degree in journalism from the University of St. Thomas in St. Paul. To learn more about Kissell, you can connect with him on LinkedIn.
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SOURCE: SOURCE: REMMOMT.COM