Seems like when the conversation gets around to what I do for a living, just the smallest mention of being involved with foreclosures sparks people’s attention. Many people are intrigued by the prospects of purchasing a foreclosure as an investment. Others are trying to find a home to live in a foreclosure leaves them with more questions than answers. With most Realtor associations reporting default sales making up 25% to 30% of all sales, it is easy to see why so many potential buyers are interested.
I always try and keep these conversations simple because each case has its own unique circumstances. Nevertheless, the basics that I explain to buyers they need to consider when they are considering a foreclosure consists of the following.
Disposition: By this I ask the buyer to self-assess. Foreclosure sales can be tricky and involve more time than many buyers have the ability, or patience, to work through. The time involved is on both the buyer and seller’s ends. For a buyer to assess a foreclosure properly, there is some legwork. Famously, the seller’s are also not known for timeliness. This causes frustration if one is accustomed to traditional sales methods.
Value : Most buyers have this one figured out..or at least they think they do. The main reason people want to buy a foreclosure is “to get a good deal”. But what exactly does that mean? We are in the business of determining value and most properties come with a range of them! The reality that most buyers should understand is when a foreclosure is priced within that range, it will frequently get multiple offers. Seller’s know this to be true. An offer of 50% of list price is not going to get you far and likely will end up with the buyer watching the home go under contract while they are asking what happened to their offer. Do the homework of identifying that range. This is an important function of using a buyers agent.
Inspect: So many offers are made by buyers who have not thoroughly inspected the property. Many buyers believe they just get the winning bid, then inspect and determine if they still want the home. Many will pursue requesting repairs prior to closing. This might be an option with some sellers…but the majority of the time it is not. Many foreclosures are sold “as-is” and the seller accepts your offer on that condition. For a buyer that means getting your earnest money returned may be challenged. Do your homework upfront by using professionals to help you determine the condition of the home.
Financing: There are some tremendous options available for buyers of foreclosures! Some programs provide financing for repairs and allow a buyer to make some personal selections for things like carpets and paint. Owner-occupants and investors both have possible low down payment options. One of the best seller financing program for a foreclosure is HomePath from Fannie Mae, offering many closing related costs waived, low down payments and many other attractive terms. The presence of a great financing package can be a huge deal when considering a foreclosure.
Ready: 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 looking at foreclosures.
One final thought. Buyers are often confused about short sales and foreclosures. They are NOT the same thing. Short sales are still owned by a seller who has not acquired the property through a default..ie foreclosure. They are people just like you and me. They do not have the ability to sell their home without their mortgage company blessing the sale because it will not provide enough cash to pay off the mortgage and provide a release. It is a complicated process and a topic for another day.