Buying Foreclosures (Part 2)
Buying Opportunities with Foreclosures
In Part 1 we discussed the different stages of a foreclosure which could result in buying opportunities. Here we explore the different opportunities and risks involved in each stage.
Today's buyers seem to be more focused on the short-term goal of "getting a deal" rather than on the long-term lifestyle improvement and savings goal of home ownership. However, in the "frenzy" created by the media about buying foreclosure homes, there are some serious pitfalls that should be considered that may result in unforeseen challenges for the average buyer.
1. Pre-foreclosure (Short Sales). In my opinion, one of the best avenues to find well-priced properties in reasonably good condition.
- Advantages: Below-market price, can perform due diligence, minimum risk
- Disadvantages: Uncertain outcome, undefined closing date
2. Foreclosure: If you are an experienced and savvy investor, buying homes at the public auction may be provide some bargain opportunities if a) the lender does not buy the property back; b) If the owners have substantial equity; or c) If the lien holder precipitating the auction is a deceased estate or the IRS.
- Advantages: The price may be well under market value.
- Disadvantages: Normally would have to buy without due diligence inspections, since owner may still be living in it. Also may have to evict owner after purchasing. Auction contract is normally "as-is, where-is", with no repairs and no contingency (including financing). Very risky for "average" buyers. In the case of auctions because of tax liens, homeowners have a 1-year redemption period in which they can re-pay the debt (plus penalties) and get their home back.
3. Post-foreclosure (REO, lender-owned). Depending on the circumstances, these properties may provide interesting buying opportunities.
- Advantages: Buyers have the opportunity to perform due diligence inspections and write contract subject to inspections and financing approval. Normally homes are priced aggressively to sell quickly, so a good bargain can be had.
- Disadvantages: Normally, REO properties have been vacant for a while, may have utilities disconnected for a while, may have been "winterized", which may prove harmful to the property (i.e. mold) or at best difficult to perform the home inspection (buyers will need to re-connect utilities and/or re-winterize at their expense)
While there are clear buying opportunities out there to purchase properties whose sellers are in distress, I recommend caution. Don't judge a book by its cover! Consult with your REALTOR and ask about potential risks and rewards before you buy!
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