Buying a foreclosure. What are the problems with buying a foreclosure? Well, buying a house can be incredibly exciting. It can also be terrifying at the same time, especially if it’s your first or second home. And so, for a lot of buyers today, the idea of getting a killer deal is the ultimate goal. It is one that you may hear is possible with a bank-repossessed property (also known as a “real estate owned” property or simply “REO”). Real estate prices have gone up, after all. So what’s the scoop on these REOs?
Can You Get a Great Deal When Buying a Foreclosure?
This is a tricky question with a lot of caveats. After all, in some markets, it will almost certainly be easier. People like to take advantage of REOs to find lower entry price points. However, other markets may not offer a lot of financial benefit to the buyer. Therefore, when market inventory is low in the property type and area you’re shopping for, prices will tend to trend higher. And this means even for foreclosed properties.
On the other hand, if you’re pretty flexible and aren’t overly concerned about neighborhoods, an area with a lot more inventory can be a difficult place for a seller, creating a super local buyer’s market. Remember, even banks are sensitive to these pressures. Therefore, they can be more flexible about their pricing. And thus, they may discount REOs more sharply in order to unload them.
Related: Choosing The Right Loan
What Should You Know Before Buying a Foreclosure?
If you manage to find a steeply discounted property that you’re interested in, there’s still a lot to consider before making an offer. The possible pitfalls with repos are many. And still, they can work for buyers who go into the transaction with their eyes wide open.
The most frequent mistake buyers make is to look at the best possible case. It is rare you get the best possible case in a foreclosure. Especially now. With record equity gains made in the last few years, most homes have plenty of equity that they never have to worry about foreclosure. After all, if you have 40% equity in your home, you can afford the 15% closing costs to sell it.
Be Aware Of:
- REOs are almost exclusively sold “as is”. Yes, that means you get what you get. Remember, the home is unlikely to have a good history.
And, it may be a lot worse than you are imagining. Sure, you could get lucky and totally win the REO lottery. But remember that many repossessed properties have been sitting vacant for extended periods. Often, with little to no maintenance or human interaction. Therefore, they may have insect and animal infestations on top of problems you’ve been made aware of. - REOs can be very competitive. Investors often really like buying REOs. Which means you’re competing against other buyers who have a lot of cash on hand. Cash deals close faster. That means there’s less risk they’ll fail to close because of lending issues. Therefore, this makes them pretty nice for a seller. A good REO is likely to be a competitive buy. So, be fully prepared, fully qualified for your loan. Also, be ready to make your highest and best offer out of the gate. You may only get that one shot.
- Always get a home inspection with an REO. In most areas you can still back out of the transaction if the condition of the home is worse than you imagined. However, be aware that these inspections are limited in scope. And thus, surprises may still be hiding. Sold “as is” means just that, though. Banks aren’t generally interested in fixing anything. And so if your inspector says the A/C is bad and the roof is leaking, you’ll need to figure that into your overall cost equation.
What About After The Offer is Accepted?
- REOs can be difficult to finance. Some REOs and lending programs are meant to go to future homeowners. However, most are not especially friendly to non-investor buyers. You’ll need a substantial down payment and a high credit score. Furthermore, you’ll want a solid debt to income ratio, and reliable employment. After all, the bank takes that a level of risk on a home that may become a money pit. It can absolutely be done. However, this is far from a basic first time homebuyer sort of process. Loans like the FHA 203(k) can sometimes be used. Also, some conventional loans, depending on the condition of the property.
- REOs can be difficult to close. If you have to borrow to buy an REO, expect the process to take months. Even if you don’t have to borrow, there are layers of red tape to cut through. After all, you’re dealing with a corporate owner rather than an individual. Allow plenty of time to get through all the steps of the process. Also, be prepared to have to pivot into a different loan program if things get dicey.
Related: Should I Waive a Home Inspection?
Should I Buy a Repossessed Home?
If you’ve thoroughly prepared yourself for owning a home with a poorly documented history and a higher than normal risk of unexpected problems, as well as the stressful buying process that can go with it all, then absolutely buy the REO if it’s right for you. Sometimes REOs are the only way to get into the right neighborhoods. Perhaps even to find a home in your budget. And so there are definitely reasons to pull that trigger. Most successful foreclosure owners add 20% to estimated repair costs. They also add a couple weeks to estimated repair time. Especially with a foreclosure, it is best to prepare for the worst.
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