First Time Homebuyer Series - Part 5A: Foreclosures

In today's real estate market, everyone wants to know about foreclosures. These are the most common distressed properties, and they are usually associated with "getting a good deal". Distressed sales now make up a sizable chunk of the market, so it makes sense to be educated on these properties.

When you hear someone say they bought a foreclosure, what they likely mean is that they bought a bank owned property. Foreclosure is the process in which the bank takes a property back from a delinquent borrower. However, the term foreclosure is often used to describe a property that the bank has taken back and is now selling.

When a bank takes ownership of a property, this property is initially auctioned off at the courthouse steps. This is an entirely different process, and one that likely isn't for most first time home buyers. For that reason, I'll skip it in this series. If the property is not purchased at the courthouse (and most are not), then it becomes bank owned. The bank will then decide on a price and list the property with a real estate agent. At this point, a buyer can purchase the property just like any other property that is for sale.

Is buying a foreclosure a good deal?

Sometimes. Just because a property is a foreclosure doesn't mean it is a good deal. A lot of buyers have gotten good deals on foreclosures, but they can be overpriced or underpriced just like any other property. We need to evaluate the home, the neighborhood, and the comparable sales to make sure it is the right deal for you.

Are banks negotiable on their price?

Once again, sometimes. The banks set their price by hiring a real estate agent and / or appraiser to tell them what price the property should sell for. A few years ago, our team had an account selling properties for Fannie Mae. In our experience, they were not very negotiable right after a property was listed, and I still see that in today's market. After all, they just paid someone to tell them the right price!

Is buying a foreclosure difficult?

It's usually more difficult that buying from a private seller. However, we've helped dozens of clients buy foreclosures and can help you navigate through the process. The banks and a lot of the brokers who list bank owned properties are not known for their customer service. Of course, some do make the process easier, but to make a huge generalization, it's usually a bit of a challenge. If this is your first house purchase, have someone with lots of experience help you through it.

Will a foreclosure need a lot of repairs?

Not always. Rarely is a foreclosed property in the "perfect"condition that a private seller may have their home. However, some foreclosures are in move-in condition with some great features. The banks are even making improvements on certain properties to make them more attractive to buyers looking to move right in without any work.

Can I inspect a foreclosure?

Definitely. Once you have a foreclosure under contract, you will hire an inspector to do a home inspection. One of the big differences between buying a foreclosure and buying from a normal seller is what happens after the inspection. With a foreclosure, if you find issues, you usually have to make the choice of walking away from the deal or moving forward and addressing the issues yourself after you buy the property. With a normal seller, you have the ability to ask them to fix problems, and often you can negotiate those repairs to be completed before you buy it.

Will I have to bid against other buyers?

If it is a great deal, then this is real possibility. This is one of the most difficult situations in real estate because you don't know what the other buyers are bidding. It could be well over asking price or they could be low balling. I always advice clients to find the price at which we will be excited if we get it, but if we don't, we can say that we didn't want to pay that much anyway.

How quickly can I close on a foreclosure?

The time line for buying a foreclosure is similar to buying from a private seller. You could close in as little as a few weeks or take the normal 30 -45 days.

Is it better to buy from a bank or from a normal seller?

In my opinion, if you could buy the same property for the same price from a bank or a private seller, I would pick the private seller. You usually find out more information about the history of the house, the history of systems, and the history of the maintenance. The bank doesn't know any of this information. As we mentioned earlier, you also have the ability to ask a private seller to repair items for you and with a bank, you have to handle these issues on your own. Finally, private sellers are usually easier to work with if you need to make any changes or do anything creative with the deal. However, the main reason so many buyers purchase bank owned properties is that the price discount offered by the bank outweighs all the uncertainty and difficulties. For a big enough savings, many buyers will deal with a tough process and taking care of issues on their own to get that deal.

Next time, we will look at short sales, which are another type of distressed property that present a good opportunity for certain buyers.

Justin Landis
Keller Williams Realty
404-803-0471
justin.landis@kw.com