Foreclosures 101
I have had 2 people call me in the past month who wanted to search the foreclosure market for a deal so I’m writing this to explain how foreclosures work and why they’re not for everyone. Foreclosures are becoming more abundant nationwide in the wake of the major shift in the U.S. mortgage market, but they’re not for the faint-hearted and are often not the quick, easy deal that they’re sometimes built up to be. While they may present incredible opportunities for some, they are always at the misfortune of others, and that is almost always obvious upon first glance. Often, the same candidates for foreclosure are also those who were in major financial trouble with no money to spare for home repairs, maintenance, and even ordinary upkeep and cleaning- the condition of these homes often leaves much to be desired.
REO, or real estate owned, just means the lender reclaims the property and establishes control over it to minimize its losses. Buying REO foreclosures is the easiest way to pick up a distressed property. When a property is owned by a lender, the lender has often paid off all of the liens, overdue taxes, and other debts against the property in order to provide a clear title. However, the result of this is that the lender is usually trying to recoup anything that they have spent on the property when buying it at the auction, which may result in the property being sold for close to market value. The “deals” can be found when a lender is racking up several of such foreclosures and getting anxious to get them off their hands, or when a specific property has been sitting in the lender’s pocket for a long period of time, and the lender chooses to cut his losses and get rid of a liability.
Buying a foreclosed property at an auction is the riskiest way to purchase one of these properties, as the home will be sold “as is.” What this means is that no inspections will be done whose results will be a contingency in the sale of the property. In some cases an inspection for information is allowed, the results of which cannot be used by the purchaser as a reason not to complete the sale. It is very possible to “strike a deal” with these, but the property could easily be tarnished by bad title or lots of deferred maintenance. When buying at an auction you can generally expect a small down payment deposit, with the remainder of the balance due within 30 days. You must do your research before going to an auction- auctions are a prime way for people who haven’t researched and secured their financing to really come out in the negative.
If you do choose to go the foreclosure route you must either commit to dedicating some time to doing your homework and researching the area and any specific properties that appear to be attractive, or I would suggest, as always, working with a Realtor to represent your best interest and help you navigate the intricacies of the purchase.
