Buying a foreclosure in today’s market
The term "foreclosure" has unfortunately become a household term for millions of Americans. For homebuyers, however, "foreclosure" has a tempting ring to it, like the sound of a cash register.
"Foreclosure" has become synonymous with bargain. During the first quarter of 2012, foreclosure properties sold for an average of 27 percent less than non-distressed properties, according to RealtyTrac. "Almost one in four of all properties for sale out there now is in some stage of foreclosure," says Daren Blomquist, vice president of RealtyTrac.
Given the steep discount and investor interest in these properties, the large inventory of foreclosures is slowly being whittled down, says Ken Fears, an economist with the National Association of Realtors. That means competition is heating up.
Why buy now? Experts warn that even though mortgage rates are hovering at historical lows and home prices continue to struggle, they won't stay that way forever. "It doesn't take an expert to predict that affordability will come down later this year," says Fears.
Time and patience required
The obvious attraction to foreclosures is the discount. That said, a foreclosure can be riddled with risk. You may discover judgments, property liens, unpaid second mortgages, unpaid taxes, and repairs you didn't see or didn't even know existed.
"Buying a house today is more complicated than it used to be, period," says John Anderson, a real estate agent/broker in the Twin Cities area of Minnesota since 1980. "There are tougher standards and stricter requirements. You need higher credit scores than you used to. That's with any sale."
Today, almost half of Anderson's business involves foreclosures. "The main differences [compared to buying a non-distressed property] are with financing and conditions. There is less or even no disclosure." says Anderson. "Each state has different laws, but I would dare say that with the majority of foreclosures you are buying the property as is."
First-time buyers and foreclosures
First-time homebuyers face special hurdles when considering the purchase of a foreclosure. For starters, they have never been through the purchase process. They do not know the ropes, and many can only guess at the energy, expertise and expenses required to repair and maintain a home, let alone a foreclosed home.
"A lot of first-time homebuyers have eyes wide open and think they can do anything. It takes tenacity, knowledge and good backing… to buy a foreclosure. Some I talk out of it because it won't be the right thing," says Anderson.
Time is one thing many first-time homebuyers do have. "The trend now is that banks are moving away from taking back these properties and instead agreeing to short sales," says Blomquist. "First-time buyers are in a better position to buy a short sale than others -- including investors and move-up buyers. They're usually in a better position to wait it out."
If you are a first-time homebuyer considering a foreclosure, perform all the due diligence you can. Dig up as much background information as possible about the neighborhood and the history of the house. Have the home inspected -- if you can -- and appraised by professionals. Experts urge buyers to hire a buyer's agent who is experienced with foreclosures, the local market and the state laws.
Feedback from the trenches
Catherine Procopio is a New York City physical therapist and first-time homebuyer who bought a foreclosed three-bedroom home in upstate New York. She says the process went relatively smoothly.
"The process was not as hard as I expected," she says, especially in light of that fact that "everybody told me it would be harder than I expected. I'd been looking, and had a price in mind of what I could afford. I had heard that sometimes banks buy back houses for more than they are worth. The bids at the auction were way above what I thought the house was worth."
So, she waited. The bank paid $120,000 for the house after the failed auction, and six months later she purchased the house from the bank for only $90,000.
However, Procopio needed to spend an initial $10,000 on structural repairs "to make the home livable."
Procopio says in hindsight, she would have done some things differently.
"One mistake I made was that I did not get a professional to inspect the house. I did get the key to get into the house, but it was the middle of the winter and there was no electricity so I couldn't turn things on. I assumed that things would work. There were signs of water damage that a more experienced eye would have noticed. Some things should have been obvious that weren't obvious to me as a first-time homebuyer, like a crack in the front of the foundation."
Her advice? "Assume the worst before you make your offer," she says.
But now she has no regrets. "It's great to have a home in the country that I otherwise would not have been able to afford."
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Judy Feldman, former senior reporter at Money Magazine for 16 years, lives in New York City and Long Eddy, N.Y. She has most recently been published at Inc.com, Insure.com and currently reports regularly for Morgan Stanley Smith Barney’s External Insights. She has written or reported for several other national publications, including Bottom/Line Personal, CBS MoneyWatch, Consumer Reports, ESPN The Magazine, FiscalTimes.com, Glamour, iVillage.com, Jewish Living, Martha Stewart, Parenting, Redbook and Self Magazines.