When looking for new investment opportunities, buying foreclosures are an intriguing option. For certain owner-occupant buyers a foreclosure may offer the perfect mix of value and attractive financing. Foreclosures offer several advantages to other types of property purchases. There also are myths and mistakes to avoid to succeed buying foreclosures. Understanding the process better will allow buyers to comfortably assess this alternative.

When looking for new investment opportunities, buying foreclosures are an intriguing option. For certain owner-occupant buyers a foreclosure may offer the perfect mix of value and attractive financing.  Foreclosures offer several advantages to other types of property purchases. There also are myths and mistakes to avoid to succeed buying foreclosures. Understanding the process better will allow buyers to comfortably assess this alternative.

Foreclosure Stages

As a potential buyer looking at foreclosures it is important to understand the three primary stages of the process.

Pre-foreclosure

The legal process of foreclosure has begun in the pre-foreclosure stage.  The property has not yet been auctioned or returned to the lien holder.  The lender has put the owner on notice of the pending foreclosure.  These properties may be a great opportunity but are also potentially very complicated and slow to buy.

Sheriff’s sale or auction

These sales represent the completion of a foreclosure.  They are risky for buyers.   If there is a mortgage lien, bidding is likely to be against the lender with that lien.  The house is unavailable for interior inspections and that is just one risk.  The former owner, or some other occupant, may still live in the home.  The buyer will have to evict all occupants to get control of the property.

Repossession

This occurs after the home has gone through a sheriff’s auction  and the mortgage lien holder gains possession of the property.  The new owner (we will call them the foreclosure owner as they could be a bank, investor, corporation, or hedge fund) has one main objective.  The foreclosure owner does not want to continue to hold the property.  They want to sell the home.  Advantages at this stage are that a buyer will receive a clear title and perform an inspection before completing the purchase. There may also be a seller-financing plan offered and some repairs completed.
In this post, a foreclosure opportunity is one where the home is in the repossession stage.  This definition does not include “short sales” as they are not a foreclosure. Some of these homes may be occupied despite the legal process of foreclosure having been completed.  The occupant could be the former owner, a renter, or an unauthorized occupant (aka squatter).

Myths about buying foreclosures

There is some really bad advise available for people on how easy it is to buy foreclosed properties. Believing these myths will cost you time and money.  People who share this advise are either just not knowledgeable, or they are selling something else such as an educational course.  There are a lot of people who attempt to profit from others misfortune. These opportunists prey on the vulnerabilities of the owners of homes in default, or the eagerness of potential buyers.
Here are just a few myths commonly shared with buyers interested in foreclosures.

Myth-Returns On Purchases Are Significantly Above Normal

As this myth grew potential buyers of foreclosures began to believe, and seek, unreasonable returns. Even owner occupant buyers believe that they can purchase a foreclosure and immediately see 20% appreciation. There are several problems with this line of thinking.  The first and most important one is simply that market forces ultimately determine the purchaser of a foreclosure.
Multiple offer situations are common when a home is priced below market.  More than one person sees the value versus the list price. What ensues though is a process where the foreclosure seller asks for “highest and best offers.”  This negotiation method will quickly provide an offer that is very close to what the seller’s multiple market valuations projected.
Very few foreclosure properties are sold at a deep discount to value.

Myth-You Should Make Your Offer At 50-60% Under List Price

A deeply discounted offer will rarely succeed with foreclosure sellers.  In fact, rarely does the seller ever respond.  Most foreclosures are already offered at a price where the seller receives multiple offers.  The list price is where the discount to market often already exists. Sometimes the foreclosure seller gets it right, sometimes they need to move the property.  The longer a property has been on the market, the more likely a discounted offer might have some success.  Just not a deeply discounted offer.

Myth-Use The Superstar Top Producing Real Estate Agents

Using a top producing real estate agent has very little benefit and may actually be a problem.  Determine what types of property your agent has sold and their level of experience and knowledge regarding foreclosures.  What you really need is to find an agent who will follow the bank’s very specific instructions for how to submit an offer!  After years of foreclosures being a major part of the market, there still are agents who think the foreclosure seller will do business THEIR way.   If you choose one of these agents because of the confidence they seem to exude, you will likely not end up with an accepted offer.  Your agent needs to be somebody who excels at following instructions and details step by step.

Myth-The Process Moves Slowly When Buying Foreclosures

You are dealing with a foreclosure seller who is likely an investor or corporation.  The buying process can be fast, so be prepared to move quickly. Be available! Whether by electronic communication, in person, or proxy.  Nobody, from the listing agent to the seller, really cares if the proposed buyer has to leave the country and will not be available to review the sellers addendum contract until next Tuesday when it is due on Monday. Your accepted offer will likely be cancelled.
The buyers and their agents need to be on top of everything from the inspection to the financing.  As a deterrent, foreclosure sellers will even build into their sales contracts a per diem fee for late closings.

Myth-The Bank Will Accommodate The Buyer’s Need For Repairs Discovered After An Inspection

Negotiation for repairs kills more accepted deals than anything else.  Foreclosure sellers usually have more tolerance for making a home habitable for owner occupant purchasers.  If you are investor, remember “as-is means as-is”.  The foreclosure seller won’t pay for cosmetic issues.  Usually the proposed sale is “as-is” and the buyer should not expect any repairs to be completed.
The first question the foreclosure seller will ask is “could the buyer have seen this need for repair on their own prior to making the offer?” If the answer is yes, chances are not good that the seller will pay for the repair.  If you really want the property, do not haggle with the seller’s response. They usually make one response and if you do not accept it they cancel the deal.

bankforeclosuresignMistakes To Avoid When Buying A Foreclosure

Avoid the following pitfalls in order to improve your chance for success in your foreclosure purchase.

Mistake-Getting caught in a bidding frenzy

Due to the perception that a foreclosure offers great opportunity,  many sales attract multiple interested buyers.  Highest and best requests from the foreclosure seller generate excitement and sell the property quickly. Bidders often are caught up in the moment and pay too much in auction type sales.

Mistake-Underestimating repair costs

Take full advantage of any home inspection period offered.  Be realistic about the potential cost of repairs.  A contractor or knowledgeable person can inspect the home and help assess how many repairs are needed and the approximate cost.  It is also prudent to factor in a cushion of 10% to 20% of the purchase price to pay for unexpected repairs.

Mistake-Not knowing what comparable properties cost

Buyers should be familiar with actual sales prices of recent foreclosures in the same area.  Use these sale prices to guide your negotiations with the seller.

Mistake-Not having financing approved or cash available

Foreclosure sellers demand a proof of funds with any submitted offer.  Buyers need a pre-approved mortgage or a bank statement showing evidence of cash or securities, dated in the last 30 days.  Foreclosure sellers will often accept the highest bid with the best financing or cash already in place.

Summary

  • Foreclosure sales can be tricky and involve more time than many buyers have the ability, or patience, to work through.   The foreclosure seller gets to control the timelines and many of the rules.  This causes frustration if a buyer is accustomed to traditional sales methods.
  • The main reason people want to buy a foreclosure is “to get a good deal”.  An offer of 50% of list price is not going to go far.
  • Many buyers obtain the winning bid first, then inspect and determine if they still want the home. Many will pursue requesting repairs prior to closing.  The seller accepts your offer on the condition that the foreclosure property is sold “as-is” and will not return your earnest money.
  • Some foreclosure sellers provide financing options.  Make sure you are aware if any exist and what the best method to use will be to pay for your purchase. Remember that a foreclosure seller is comparing offers based on the net return to the seller.  Think twice before loading your offer up with a number of seller paid financing costs.
  • All foreclosure sellers require proof of funds prior to considering an offer. If you want to make an offer on a foreclosure, traditional financing contingencies do not apply. You need to have a bank approval letter dated in the last thirty days or proof of cash. If you do not have one of these, then you are not ready to be buying foreclosures.

Foreclosures offer opportunity for all types of buyers.  Cutting through the myth and mistakes, in order to be prepared to act, is the buyer’s challenge.  Understanding the process and using experienced professionals to guide you will offer the best path to success in purchasing one of these unique properties.

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