Buying a Foreclosed House -- Not as Easy as You May Think

According to the Wall Street Journal, housing foreclosures are going to skyrocket:

The number of foreclosed homes is expected to quadruple this year, adding one million properties to the market in 2008 and again in 2009, according to Lehman Brothers.

So you'd think it would be easy to buy a foreclosed home and get a great deal. But the Journal says that isn't the case:

Despite the growing number of foreclosures across the country, there are few bargains to be found at auctions. For one thing, you'll be competing against savvy local investors who know how to gauge a property's real value. What's more, many properties are mortgaged so steeply that banks often ask for bids that are higher than the properties are worth.

But all hope isn't lost in the quest for a bargain:

There are other ways, though, for a determined buyer to tap into the foreclosure market. One is buying a home in "preforeclosure" directly from the homeowner. Another, more-promising route: buying a home that failed to sell at auction and has been put back on the market by the bank that holds the mortgage.

This is one issue that I'm facing as we look for a new home. I'd be open to buying a foreclosed home, but there's no readily available listing of them. So an individual either has to put in a TON of time and effort to MAYBE find a home they'd consider acceptable or know someone who does (like an agent that's connected in the local market.) I've found what was supposed to be a connected agent, but she's not showing much success to date.

I think the way these foreclosures will help us is that they'll flood the market with homes and the resulting supply will drive down prices overall. It could still be a brutal year or two for home prices, which is one thing we'll need in our favor if we decide to make a move.

Comments

[RL]

We bought our home at a foreclosure public auction 3 months ago. To buy at a public auction is incredibly risky - normally you can't have the property inspected in advance, and usually you don't even get to see inside of the house if there are still people living there. We got lucky because my husband is a real estate agent, and his company had tried to sell this house for the buyer, with no luck. We really liked the house, and all the cards fell into place to make it happen, but I wouldn't recommend this route to anyone else. Here's another big drawback - over 3 months later and we are still waiting for the court to issue final judgement so we can get clear title to the house. We can't close until all the paperwork is in place, and it's taking forever. Not ideal for someone who needs to move by a certain date (or is trying to line up the sale of their first house, etc.)

Friends of ours are trying to buy a bank-owned property right now (where the bank took title at public auction either because no one showed up or no one bid higher than them). This is more similar to buying from a traditional seller, but there are also more risks involved. If the bank accepts your offer, you sign the P&S within 5 days, put deposit in escrow, THEN do your home inspection within 10 days and if there are issues with the inspection, the bank can opt to fix them (unlikely) or give you back your deposit. There is also a 10-20 page "seller's addendum" attached to the P&S that removes all liability from the bank if something goes wrong (the list is long). So it can be done, but again, it's tricky.

Either way, with homes that have been foreclosed, you run the risk of prior owners damaging the house out of spite, or just not taking care of the house in general. I think these risks are less likely overall in this market because of so many foreclosures resulting from just bad loans, but still, lots of risks involved.

[F. Morana]

So a million new properties are coming onto the market, which cannot be acquired except by extraordinary means?

If so, it appears that a small minority of well-connected investors now stand to make a bundle off other people's misery, and that this, in effect, is really a continuation of the housing "boom" -- except that the boom is no longer in the hands of Mr & Mrs American Public, but rather, is now becoming concentrated in the hands of a small minority.

[Master Your Card]

I'd hold off on buying any property until we can be sure the market has fully 'bottomed out'. Don't forget that most of the sub-prime mortgages still haven't reverted to their normal rate yet... it's possible we're merely in the eye of the hurricaine!

[JK]

I'm signing on my (not-so) shiny, new foreclosure today at 10am. It needs a touch of TLC, e.g.-the back deck has mysteriously been cut off and removed. However, I was able to purchase an 1800 sf split level home in the midwest for less than $100K. The county appraisal is $143K, and most of the neighborhood is appraised at $150K+.
The process wasn't difficult, but certainly more time-consuming than buying my own home. The hardest part, probably of any real estate transaction, is finding a decent realtor! I did OK this time around, but I feel like this one was the exception. Having said that, her broker has been a royal pain! Between lying to me and my lender, and making me feel like an inconvenience, I'm quite certain I wouldn't do business with her again.
Good deals are out there. If you are interested, talk to your bank's loan office. Mine tipped me off on a property they were auctioning that went for $50K less than county appraisal, with no serious issues, but was too far from home for me to be interested.
Good Luck! And if you're handy with the hammer, look me up!

[Brent]

You can say you got a 'deal' all you want but fact is... home prices are going to continue to fall, especially in Michigan. I have been tracking home prices in the metro Detroit area and prices will drop $20k on some house overnight and still not sell.

Who is going to buy these millions of homes that are now on the market? Its not going to be those who walked away from their homes and ruined their credit. Most people cannot sell their existing homes in order to buy one of these 'bargains' that are out there.

The only people who can make this housing boom go away is really the first time home buyers. They are the only ones who can absorb some of these homes out there and if the economy isn't doing very well... you don't usually make large purchases.

I am holding off until 2009 to buy my first home and I know a lot who are in the same boat. Don't buy a home now, interest rates and house prices are only going lower.

[Lolita]

We're also in the middle of purchasing a foreclosed house. Surprisingly enough, it's gone relatively quick. We started looking the second weekend in January, I found the house on foreclosures.com(without paying the subscription fee) and brought it to the attention of our realitor. We looked at other houses in the area but kept coming back to this one. We decided to put in a contract and asked for all closing costs and down payment to be paid by the seller(the bank). They agreed with a few minor stipulations and we were off to the races! The appraiser was at the house 2 days later and not only appraised it for 20K over what we're paying but also said that it was the cleanest foreclosure she'd seen. We were all set to close last week when we hit our first snag. The title company called to tell us that the bank had neglected to transfer the title out of the original buyer's name into theirs so we wouldn't be able to have the title transfered to us until that happened....wait 2-3 weeks for this to be complete. We're hoping now that we'll be able to close the second weekend in March which will save us two months in rent due to when the payments are all due.

I'm not thrilled with the realtor. He's an older man that doesn't need the money or work but my boyfriend insisted that we use him because he had used him on a previous purchase. On every house that we looked at, I had more information on the houses than he ever did(what are we paying him for other than to know the codes to get into the houses?) The mortgage broker, I hold about as much love for as the realtor. Customer Service is not her strong suit. If we make a call to her that she is expecting, she won't answer, cell or office, but will call me back between 8-9pm. This kind of professionalism would get me fired immediately. While I'm certainly not thrilled with these people, I am happy with how fast this process over all has taken considering that we're buying a foreclosure.

[Amy]

I'm confused, we put in an offer on a foreclosed home on Friday morning. Got a counter offer from the bank at close of business Friday which gave us the weekend before we had to accept or decline. Today is the first Business day back ( Monday). We called our agent first thing this morning to accept the banks offer. The house was shown on Saturday by the listing agent and an offer was placed that day. Somehow from what we understand the banl may be able to accept the other offer if it was more favorable for them. How is that possible? Isn't that why you sign an offer to make it binding. Since the bank gave us a counter offer don't we have the right to accept or decline before another offer is even considered by the bank?