The Frenzy on Foreclosures

We’re hearing lots of talk about foreclosures.  Stories of predatory lending, struggling banks, their effects on home prices.  It seems that everyone is a looser when it comes to foreclosures.   Then, late at night, some slick info-mercial on real estate comes on and talks of making millions in real estate through distressed property sales (aka foreclosures and tax sales).

St. Louis has its share of foreclosures.  It seems that there are more in the county now, but there has always been a fair amount right here.  So naturally, those in the market to buy get excited.  They may not buy into the info-mercials plot to make millions, but maybe they can just find one great deal for their own residence.   What a deal!

When it comes to foreclosures, there are just a few things important to know about the process that seem to get glossed over or missed completely.  Buying foreclosures does come with some drawbacks too.

The public perception today is that banks are in trouble.  That is also a fact, but to derive logically that because banks are in trouble, they will be more accomodating in selling off their owned assets (REO) portfolio is a FALACY.  Today banks are as slow and seemingly disinterested in working to sell properties as they ever have been.  Negotiation processes haven’t changed, and problems dealing with buying foreclosures have actually increased in the past few years.

Another fallacy which can sometimes work out well for a buyer is that banks sell properties below market. 

Banks sell <a href="distressed property“>distressed properties.  People get behind, they are unable to perform repairs and do regular maintenance that a financially responsible homeowner would do.   Additionally, most of the time, some additional destruction takes place.  My quasi-psychological speculation is that people resent the bank and the house so they destroy or otherwise dismantle the place, lowering the value significantly.  When buyer’s see the place after the foreclosure, its sometimes overwhelming how much stuff needs to be done to even make the place livable.  Painting a few walls may not be much, but re-painting an entire house can take a full week or more of full time painting.

Repairs, Warranties, and Disclosures.  Generally in a home purchase, the buyer hires a home inspector to come out and inspect all systems.  This can be done while the home is under contract.   If inspections aren’t satisfactory, the buyer can back out with a refund of earnest money.  With foreclosures, there usually isn’t an “inspection period”, and if the buyer chooses to perform inspections, they could and often do loose the house to another buyer.  So they’ve just spent $250-400 for an inspection on a house they can’t buy.  No warranties come with foreclosures and there also isn’t any information available from the seller regarding when updates were made or problems experienced.  These “Seller Disclosure Statements” are sometimes very useful in finding out about the condition of the home and how well it was cared for.  Lastly, most non-foreclosure sales can be contingent on certain stated items being repaired.  This list of items to be repaired comes after the price negotiation.  Foreclosure sales virtually NEVER fix anything.  Sales are done “as is”. 

As a professional, many deals are done and buyer’s sometimes just don’t add up all the hassles and costs that are required with a foreclosure that wouldn’t be if the home was purchased from an owner occupant.  Deals can be had, but many times it seems that if a home buyer or real estate investor had realistic costs prior to the negotiation, they would be getting just as good of a deal by NOT buying a foreclosure.

These are just a few circumstances, no where near a complete picture of the problems that could happen in buying REO properties.  The bottom line in buying foreclosures:  BUYER BEWARE!