Potential buyers call our office wanting to get in on a discounted price on a foreclosure home. Something where the borrower has decided to let it go, decided to let it go to foreclosure and the foreclosure trustee is going to conduct the sale and auction the property off to whoever is standing there with money and potentially someone is going to be able to get a great deal on it, to be able to buy a property at a steep discount to the market price. At least that’s the idea. So buying a foreclosure home can be tricky and can be dangerous and I’ll get into elaborating on why. First of all, most of the time, the only people that buy foreclosure homes are investors.
Not people that are going to buy the home and live in it themselves but big companies, well-funded funds or groups of investors who have cash and the reason for that is because at a foreclosure sale, the foreclosing trustee is going to want cash. Maybe not that particular day, they may accept a deposit and then cash within a certain number of days after but within a very short period of time, if not that day itself, the trustee’s company needs a cashier’s check for the full amount of the property. There isn’t a window of time or grace period to go get a loan or get it approved or anything like that. It’s pretty much give me a cashier’s check and I’ll sign over the title to you.
So that’s why it limits who really can buy a foreclosure property. You have to be able to pay cash for that property. So most of the time, it ends up being investors, the people with the cash who come in and buy the properties. It kind of rules out a lot of normal everyday homeowners who want to buy and move into the property. The other thing though, to really keep in mind if you are considering buying a foreclosure property is the condition of the property. At the foreclosure sale, you don’t get an opportunity either before or during the process to go inspect the property. There is no walkthrough. It’s not like an auction for cars where the car comes through a lineup and everyone gets a chance to inspect it, crawl around under it or look at the engine.
No. Nothing like that happens. The foreclosed property is locked up. Somebody usually lives there or if you go on the property, it’s trespassing, you are not permitted as a potential buyer to go look at that property, walk through that property or have it inspected. You are pretty much just buying whatever it is that is sitting on that piece of land and it could be a great house that someone has meticulously taken care of and everything is in great condition or alternatively, it could be a total wreck inside where someone just decided they were going out with a bang. Had a big party, lit off some fireworks, poured concrete in the living room, who knows? I’ve heard some crazy stories about the condition of properties after a foreclosure sale.
That’s the big risk factor and that’s typically why foreclosure properties are sold at a pretty big discount to the actual market price of what that property would sell for in a normal retail sale scenario because there is this unknown factor for the investor. What’s the property going to look like inside it? It could be completely gutted, it could have no walls, it could have no plumbing. People also come and steal things from vacant properties sitting there empty, you get some kids in the area who come in and steal the pipes and the toilets and who knows what else? Vandalism, so it’s a real problem and that’s why buying a foreclosure property is a risky proposition.
However, there are always those diamonds out there, there are always those nuggets where someone took perfect meticulous care of it. It ended up going to foreclosure and the investor hit a home run by getting a great property at a tremendous price. In my opinion, a better way to go about it is to not wait until the actual foreclosure sale but try to buy the property right before the actual sale from the previous homeowner and do it a s a short sale. So go to the home owner and say, look, it’s about to go into foreclosure, I can offer you X amount of dollars, lets make this happen. That’s a way to take all the other bidders out of it. All the other investors aren’t getting a chance to bid.
The Home owner is negotiating directly with you and in my opinion that’s a much safer way to do it. You go in and inspect the property, take a look at everything, have your home inspector walk through and it’s also a great way to get a deal because the bank knows that in a few days, it’s going to go into foreclosure and they are going to lose money, so oftentimes, they’ll approve it at something reasonable. You are not going to steal the property but something reasonable and affordable and which reflects the condition. Usually there is some deferred maintenance, some other issues with the house but definitely something to consider and watch out for; condition issues.
Anyway, those are my thoughts on buying a foreclosure property. If you are an investor with ash and you want to go to an auction and buy foreclosure property, that’s a great thing to do. You just have to protect yourself by limiting how much you are willing to offer and say that’s my limit because you have to assume that the property is going to need a ton of repairs, you don’t know what the inside is going to look like and that’s really where you are going to get burned. It’s paying too much and then having to put a ton of money into it to bring it up to standards where you could resell it. So be careful and ultimately for the system to work we do need people buying foreclosure properties at sales.
It’s the only way for lenders to work through the inventory of unsold homes that nobody wants. So we need those investors at least participating but it can be a great way to get a deal. So those are my thoughts on buying foreclosure property. Of course, if you have any thoughts on legal questions or any questions in general about buying property, please feel free to call our office. I’m a real estate attorney as well as a licensed real estate broker and we do all sorts of transactions including short sale transactions, buying and selling. So often times there are deals out there which are not that well-advertised, they slip through the cracks and frankly, if you are patient, that’s probably the best and safest way of getting a deal on a property.
For more information on Buying Foreclosure Property, a free initial consultation is your next best step.