When I first entered the real estate profession post-housing bubble, foreclosures were everywhere, making up a large percentage of market inventory. As of June 2015, foreclosures were down 70% from their peak in 2010- a sign that the damage caused by predatory lending and the financial crisis has mostly passed. However, there is a baseline of foreclosures for sale on the market, and they always grab buyers’ attentions due to their lower prices. What, then, is involved in the purchase of an REO (Real Estate Owned) property?
CONDITION: Foreclosures are often left in tough shape, with stuff left around the home and a serious lack of maintenance. While occasionally you’ll find a gem, you will also occasionally find a house that makes you run out the door screaming. That includes houses with 30 ft sinkholes in the back yard and houses that smell like an army of rats used it as their personal powder room. If a foreclosure has been for sale in a popular market for more than a few months, you can guarantee there are condition issues. Foreclosures can be great investments for investors or people who don’t mind putting money and sweat into the house to make it their dream home, but generally aren’t going to work for young families or folks with a time-consuming job.
HOUSE-HUNTING: An REO property is a bank-owned or government-owned property. As usual, the seller- whether bank or big G- wants to sell the house quickly and for the best price possible. However, since REOs are usually in questionable condition, the bank offers the house at a below-market price, reducing the price at intervals if there are no offers. When making an offer on a foreclosure, you have a little flexibility on asking price if the house isn’t super hot. If the house has multiple offers on the table, be sure to put your best offer forward. If, however, you seem to be the only bidder, you can risk insult when making your offer. If you’re low-balling it, keep in mind that cash gives you the most leeway, followed by a conventional loan. FHA loans don’t usually work with foreclosed properties, because of government inspection requirements included in an FHA loan process. Finally, like any offer on a house, include full proof that you have the funds and/or financing available to purchase the house.
PROCESS: Most REOs require that the buyer pay the full transfer tax on the house, versus a normal sale when the seller and buyer split the transfer tax. Also, the buyer is almost always expected to pay for and obtain a resale certificate (also known as Use and Occupancy) for the property ahead of settlement. As for title, while buyers may be tempted to offer quick settlement to the seller, REO titles take time to clear, and most sellers, whether bank of government, will request at least 30 days to clear title ahead of settlement. Keep in mind that once a title has been cleared and you have purchased the house, your title insurance will protect you from any future obligations held to the title. Just be sure to get title insurance!!
So that’s my primer on buying a foreclosure. I have helped buyers purchase foreclosures from banks and government entities alike, and I have to say that the biggest problem for the buyers down the road (I keep in touch) is condition. Buying the house is relatively straightforward, but fixing it up is a lot of work. If you really like renovation, or have the funds on hand to make a foreclosure into your dream home, then go for it! There are also renovation loans available in both the FHA203k and conventional programs.
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