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Buying a foreclosure? It's more than just cheap real estate

By   |  Posted in Contributing Voices

With many markets saturated with foreclosed properties, more prospective homebuyers are taking a closer look at these types of properties than ever before. Purchasing a foreclosure isn't just a simple matter of scoring a dirt-cheap bargain, however. What should you worry about -- or not -- when buying a foreclosed property?

Foreclosures being sold by banks have long been an attractive opportunity for real estate investors. But today, these homes are so plentiful in some markets that many consumers are purchasing them as primary residences.

The big attraction of purchasing a foreclosure is the expectation that it can be bought at bargain-basement prices. Whether that expectation holds true depends largely on local market conditions and what Keith Gumbinger, vice president of HSH.com, calls the "desperation factor" of the bank that needs to sell the property.

"A bank isn't going to give a property away," Gumbinger says. "But it's possible that, relative to other homes on the market with similar amenities, the price may be a little bit cheaper."

The reality is that banks may price aggressively to create interest in a property, but homes that are thought to be a good value will then attract multiple offers and ultimately sell at the market price, explains Brad Snyder, a REALTOR® with ZipRealty in Las Vegas.

Buyer beware

Foreclosure properties can range from ready-to-move-in condition to fixer-uppers. At any point on that spectrum, buyers should be prepared to "overlook all cosmetic issues" and "save some cash" to make their own repairs, Snyder suggests. Banks might -- and the word "might" should be emphasized -- make some -- and the word "some" should be emphasized as well -- repairs, but nearly all foreclosure homes are sold strictly as-is.

"It's not like the homes are in bad shape," Snyder says. "They have dirty carpets, leaking faucets. It's usually generally minor things."

A home inspection is a must, so the buyer will be aware of the home's condition and can either back out of the deal through a contract contingency or at least be well informed about the repairs that need to be made.

"The last thing you want is to move in and, a month later, have the water heater explode on you," Snyder says.

A related concern also may give buyers pause. A large number of foreclosures can have a negative effect on a neighborhood, condominium association or housing development. Some homeowners associations are in dire financial shape, and may have trouble covering maintenance or insurance costs. In the case of a failed or partially-completed development, the beautiful grounds and attractive amenities shown in that glossy sales brochure may never have been built, depending on the developer's financial situation.

Financing can be tricky

An all-cash offer strengthens the homebuyer's position, but cash isn't necessarily a bank's only consideration, Gumbinger explains. "Lenders are very interested in mitigating loss. They would love to entertain an offer that's a little more than the minimum price they've put out there," he says.

Buyers who want to secure a Federal Housing Administration (FHA) loan need to be especially flexible. Some banks shy away from buyers who need this type of financing because the FHA may require specific repairs to the property before such a loan will be approved.

"If (the repairs are) small and cosmetic, generally we can get those passed through FHA financing, but FHA does slow things down. The banks don't want to make repairs or get entangled in long escrows," Snyder says.

Flipping days are over

During the housing boom, real estate investors snapped up cheap properties that could be fixed up and resold for a quick profit. Today, foreclosure buyers need to take a longer-term view, Gumbinger suggests. Buyers who have a "flipping mentality" (buy cheap, clean up and sell at a tidy profit), are "probably going to be disappointed even if they have a one or two-year time horizon," he says, since prices aren't likely to leap in that time span.

"Robo-signing" scandal shouldn't be a concern

Buyers who are concerned about the recent "robo-signing" and affidavit scandals, which have created more market uncertainty about foreclosed properties, needn't be overly concerned about claims from prior homeowners.

"The actual number of wrongful foreclosures is likely to be miniscule as a percentage of the problem--so no, I don't think you'll get folks who will come back ringing the doorbell," Gumbinger says.

The bigger risk, in his view, is that sales of foreclosed homes may be delayed while banks review and confirm their paperwork. Buyers, he says, need to have "a patient mindset" and a contingency plan in case the closing date is put off.

Snyder says the robo-signing-related disputes are a matter that's between the loan servicers and the banks or investors that own mortgages, not foreclosure buyers.

"People don't need to be worried about former owners knocking on the door and saying, 'We're going to try to get our house back,'" he says. "If you get title insurance, you are getting clear and free title."

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