Is buying a home in foreclosure a good idea?

I’ve been in the real estate business for 10 years, and even back then — when I’d never heard the term “short sale” and foreclosures were something that happened in far, far away lands — buyers were asking about buying foreclosures as a way to get a smoking deal on a property. They look like good deals, but are they?

Before I get to foreclosures, I’ll explain a little about the steps leading up to foreclosure (auction on the courthouse steps, or the bank repossessing the home) and what happens after as well (sale as an REO).

When a seller falls behind on payments, he or she can explore a short sale. Most of us had never even heard the term “short sale” until the financial world imploded a few years ago, but now, we know them all too well. A short sale happens when the lender or lenders agree to allow the owner to sell for less than is owned on the property. The lenders take a hit, the seller’s credit is damaged (but less, supposedly, than if the house is repossessed), and the buyer may or may not get a better-than-market price, depending on the lender’s bottom line. Calling these sales short definitely doesn’t apply to the amount of time required to get one closed; I had a buyer in contract on one for 6 1/2 months, at which point the lenders decided to foreclose instead. Granted, that was a couple of years ago and most banks have improved their processes since then, but still. Six and a half months to wait for an all-cash offer to be turned down was a major bummer.

If a property makes it all the way through foreclosure (more on that in a second) and ends up as a bank-owned property, the major differences in the process involve disclosures (banks usually refuse to provide any disclosure that isn’t required by state law) and negotiations after inspections (banks usually demand an as-is sale). That said, Matt and I just closed a deal today in which our buyer clients got an FHA loan that required some repairs. The bank made the repairs and also gave our buyers an $8,000 credit for closing costs after we conducted our inspections. Never say never, right?

So, back to foreclosures. This is the step when the house is taken away from the owner, either by a buyer at the auction on the courthouse steps or the bank if no one buys it. This process isn’t for the faint of heart. First off, it’s often impossible to even see the inside of the house prior to bidding. After all, if the owner is cranky that his house is about to be taken from him, why would he let someone in to see it? There are no loans allowed, so the buyer must have cash. There are no inspections — so what you see, or what you don’t see, is what you get — and the new owner takes title subject to any unpaid taxes and penalties.

My two cents: buying a foreclosure isn’t a good idea for a novice buyer or anyone who is risk-averse. There are plenty of regular sales, short sales, and REO sales…leave the foreclosure sales to the investors with wads of cash and nerves of steel.

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