You’ve probably seen or heard of foreclosure listings when searching for a new home and wondered if it’s a smart choice for you. While they can often offer significantly discounted prices, there are some important considerations and risks to be aware of.
What Is A Foreclosure?
When a property owner is unable to pay their mortgage, the house is seized by the bank or other lenders who will attempt to sell the property at a foreclosure auction. If the property fails to sell at auction, it becomes an REO (Real Estate Owned) property. The bank or lender will work with a broker to put the REO property on the market to be sold “as is” after they have prepared the home for sale. They will ensure that any liens existing on the property are cleared and that the occupants are removed.
How A Foreclosure Is Priced
The asset manager of a foreclosure will order one or more Broker’s Price Opinion (BPO) reports and an appraisal. The prospective listing agent will prepare a BPO report which establishes a par market value based on comparable sold properties and homes currently on the market. The estimated cost of work required to bring the property up to the par market value is subtracted to calculate the starting asking price. Generally, foreclosures go on the market for around this price.
When considering a foreclosure home, you should get a good list of comparable homes in the neighborhood to compare pricing. The difference between the foreclosure and the prices of comparable listings in the same neighborhood will give you an idea of the amount and cost of work required to bring it to par market value using the services of professional contractors.
While some online property search tools will locate foreclosed/REO listings, an easy and reliable way to find these listings is by working with a real estate agent.
Nationwide, there were about 50,000 foreclosures in September, 2019 according to RealtyTrac.
Foreclosure properties also tend to skew higher in volume in certain price points, with the highest availability in the $100-200K price point, as shown in the following report.
Sold As Is
The bank or lender selling the property is not going to invest in repairs since they’re simply attempting to recoup their losses and nothing more. Without an inspection, you have no idea if there are significant repairs needed which is a huge risk. You should find a way to get an inspection unless you’re willing to take on this risk. If an inspection isn’t possible before making an offer, you can include a contingency in your offer that allows you to exit the transaction if significant property damage is found later. Such a clause could reduce your chances of getting the property if there are a lot of offers, with some not requiring an inspection contingency.
Debt Against The Property
Confirm the bank or lender has cleared any debts against the house that you don’t want to inherit. These could include liens, outstanding loans, taxes, HOA fees. A title search will reveal any debt against the property. Also, title insurance will protect you against loss from defects in a title.
Enlist The Right Help For Success
As you can see, there are risks with foreclosure properties that can work against you if you aren’t careful. Working with a real estate agent experienced with REO sales and a real estate attorney (real estate agents are not lawyers) are worthwhile investments to make sure you come out with a successful home purchase at a good value.