Buying a Foreclosed Property

As most of you know, we're currently house shopping. A few days ago we looked at a house that had been foreclosed upon by a bank. The owners had trashed the place (broken out light fixtures, driven through the yard, smashed a couple windows, etc.) as they moved out, but the place was decent. With a little work, it would be very nice. And depending on the price the bank will sell it at, it could be a steal. We'll see -- we still have a lot of looking to do.

As you might imagine, foreclosure sales are up recently. The details from CNN Money:

Business, according to Webb, is jumping; it grew 20 percent during the first quarter of 2007, usually a slow period for the company, compared with the fourth quarter of 2006. He anticipates even better times for the next year or two.

I bet. We're at the beginning of this whole real estate mess (where people have over-extended themselves to buy houses they can't really afford -- taking out risky loans in the process) and there are going to be a lot more foreclosures before we see a slowdown.

I'm not sure if there's any "baggage" associated with a foreclosed home or not (maybe some of you can tell me if there is or isn't.) I'm assuming as long as the title is clear (which we'd check) and the house is sound (which we'd have inspected), then the buyer would be ok. And, of course, we could be really ok if we got a great deal. Consider this:

But most of the houses do sell for less, and about 15 percent of time "shockingly" so, said Williams.

I'm looking to be in that 15%. ;-)

Any pros or cons associated with buying a foreclosed property that I should know of? I know that I have regular readers who are more experienced in real estate than I am. Please pass along any knowledge you have to the rest of us.

Comments

[Kevin]

FMF you say the previous owners used a Saddam-style scorched earth tactic on the way out? I would never buy a house where that happened for at least two reasons. First, the previous owners could have done all kinds of things that even a good inspector wouldn't find (use your imagination for examples). This would be consistent with the behavior of a person acting out of spite to destroy the property of others. Second, they have shown that they were willing to criminally vandalize the foreclosing bank's property (presumably as a response to emotions that it's really still theirs). Why would you believe they would not be willing to do the same to you after you buy the home?

I'm not against buying foreclosing properties generally, but foreclosure or not I avoid assets that have been and potentially still are targets of vandalism and sabotage.

[Truth]

I agree with kevin, a previously vandalized property most likely would still hold emotions from the past. I myself have visited a home I once lived in ( though we moved on great terms) the new vacants were doing an awesome job at keeping the place up, but thats also to say... Whats to stop your not so friendly past vacants from visiting and becoming upset through your prosperance...

[Bill]

I'm also looking at a foreclosed property as my next home. However, the previous owners didn't trash the place on the way out. The worst thing they did was take down some of the blinds... but they left their almost-new refrigerator. Strange.

Anyway, the biggest thing I've seen is that the foreclosing bank has their own real estate contract addendum that they insist on using, which changes many of the provisions in the standard real estate contract for my state (Tennessee). As you can imagine, it's designed to protect the bank from liabilities and lawsuits and has some provisions that are less than friendly to the buyer. But it still allows for a home inspection, so if that goes well, I'll go ahead and buy the property.

The foreclosing bank will do everything they can to protect themselves at your expense, so read their paperwork carefully.

[tinyhands]

I would not expect the owners of a foreclosed property to have performed regular maintenance on anything in the home, regardless of whether they vandalized the property on the way out or not. What constitutes "regular maintenance" varies a bit in different parts of the country, but might include the septic system, heating & cooling systems, water heaters, pest (including termite) control, and even foundation and siding. Long term neglect may require significant outlays to bring up to snuff.

[Lord]

But if they owned it long term, it most likely wouldn't have been foreclosed on, and if it was a recent buyer most likely they would have made move in improvements. I would caution against fixers since so often what you see is only a small part of much larger problems, but if it really is superficial and you can get a great deal it may be worth it.

[Blaine Moore (First Time Home Owner)]

In my area, foreclosures were just as expensive as normal sales so we decided to avoid the hassle when we were shopping for a house a couple years ago.

[Rusty]

I recently bought my first house which was a foreclosure. One thing I learned is that you need to get to know your surrounding neighbors because through them you can find out a few things. I'm talking about the neighbors that have lived there for several years and know the neighborhood well. There is always a couple of those around. Most of the time they will also be curious to know who moved in, either way they can give you useful information...
1) who build your house
2) what major things are wrong with your house (inspection will tell you mostly everything, but some things can get overlooked)
3) who the previous owners were
4) their reason for leaving or why the foreclosure happened

From a security standpoint, it's important to secure the house by improving locks, installing alarm, improve ext lighting around house, changing garage door signal, repairing fence and gates, trimming down bushes and trees around house etc. to ensure if someone were to come back...they will think twice about messing with the house due to the improvements made.
It takes money, but you can use the money you saved by purchasing a foreclosure to make these improvements. This theory can be applied to anything that has been re-possessed and then purchase by you for a reduced price. Foreclosures are risky, but if you are pro-active in securing your home you should have no problems.

[Ciji]

You guys can scoff all you want about previously vandalized properties, but I know of people who purchased such gutted homes in great neighborhoods for almost 60% off and have come out on top. One 5 bedroom, 4 bath 2-story house that comes to mind had all the carpet, doors, handles, light fixtures, sinks, and windows removed by the previous owners. It sold for $250K 3 years ago at the auction. The new owner sank about $200K into it. It sold last week for $1.3 million.

But... I live in LA...

[Austin]

One thing to be very careful of is this: Check to see the status of the previous owner. I sometimes do repair work (fixing the things listed above :) for a guy that regularly buys forclosure homes. He recently ran into one where after purchase, we went to the home and it was occupied by a single mother and her 2 children. She refused to leave and the officer that he called said he could not evict a single woman from the residence even if she didn't pay rent or otherwise. He is stuck with a tenant who pays little or no rent each month.

His solution for this, that I don't agree with btw, is to cite dry-wood termite infestation, cut off the water and have the house tented and bug-bombed. He'll have to pay for four weeks rent at a nearby motel, to make it legal per the authorities. Then board up the house after the work is done, so she'll have to pay the motel or look somewhere else.

[roger]

Question? Where can you find out about foreclosures? Do you have to sign up for one of those online services? The house next door has been empty for several weeks. Just today I saw the previous owner moving some furniture out of the house and so I asked him what was going on. He said the IRS had taken everything he owned and that in 3 days the house was no longer his. If the IRS now owns it, will it go up for auction?

[The Dough Roller]

I've purchased four single family homes as investments, all of which were foreclosure properties. In the process I've looked at dozens of foreclosures, both bank owned and homes being sold through HUD and the VA. While one or two of the homes I've seen were in great shape, most needed substantial work. Some of the homes were so bad, I was scared to walk down into the basement. That being said, my experience has been very positive. The homes generally do need substantial work, ranging from a complete kitchen remodel to a new roof. All need new carpet and painting. The one thing I avoid is any home with problems with the foundation. Otherwise, I think buying a foreclosed property as your residence or an investment is a great way to go. Of course, a careful inspection of the property is a must. Good luck!

[FMF]

I found out about this one from a friend who lives in and knows about the area we are considering.

You may want to check with banks in your area for leads on foreclosures.

[Steve "The Credit Card Debt Man" B]

Yea Roger good question. Where in the world do you get a good list of forclosures? I would love to have access to knowing where and how to find great real estate deals.