I have been involved in many foreclosure sales in my 7 years in real estate. Over that time I have learned a lot about the process and thought it would be especially helpful to buyers for me to clear up and separate truth from myth. I have been on both sides of the transaction, some transactions representing the bank, some transactions representing a buyer so I can definitely tell you the mind set of each side.
I receive calls all the time from buyers who say, we really would like to buy a foreclosure. My first question to them is... "what makes you want to buy a foreclosure"? Their response is almost always the number one misconception about foreclosures..."Because we want to get a good deal". If by good deal they one is meaning less then market value then this is extremely inaccurate. I can tell you from working with some of the largest lenders in the United States that my number one purpose to them before I receive the listing is to give them a detailed report (often times 5 or 6 pages) of not only my estimation of the "as is" market value of the home, but pages and pages of verified comparable information. Often times the lender will also hire an appraisal for the same reason, to make sure my estimation is accurate. If I am inaccurate, I most likely will not get the listing. I can't be too high and I can't be too low, I need to be accurate. The reason buyers misconceive that foreclosures are selling for less then market value is because most foreclosures sell for less then the average home in the area. The reason for this is because many foreclosures are in extremely poor condition. My job is to estimate what those repairs may cost and take that into consideration for my "as is" price estimation. A foreclosure home is selling for market value just like any other home, it is just (in general) in a lot rougher condition then most owner occupied homes. I could actually argue that many foreclosures sell for more then market value because the perception is that they are a better deal which causes the home to have more demand from buyers then a owner occupied home (That is a whole other blog entry).
Now for the condition. When I say rough condition, rehab, or handy man special, I do not mean paint and carpet. Most likely the owner of the home did not just stop having money over night and lose the house. Most likely they were over extended for a long period of time before they actually could not afford to pay their mortgage. This leads to years and years of possible deferred maintenance. Roofs, foundations, HVAC systems, plumbing, it can really run the whole gambit. If you are a novice looking for a foreclosure, go right ahead but I assure you if the listing agent puts rehab, they mean rehab. The last foreclosure that I sold was one that closed last month. I had the home sold in 30 days to a buyer with construction background. Within those 30 days we had over 100 showings. The home was priced under the average for the subdivision but needed substantial work and was priced AT MARKET VALUE. I knew it was pried properly for the condition to sell but it was going to take someone who had an expertise in home repair. I put in the listing that the home was a rehab so to warn other agent and their buyers that this home was not for the novice. I respect people's time and did not want them wasting their time looking at a home that needed repairs over their head. Even with putting that in the listing I still received over 100 showings in 30 days. 95% of the feedback I received was "This home needs much more work then what my buyers are looking for". This tells me those buyers could have saved time by not looking at the home and should probably not be looking at foreclosure home(most anyway). I promise you that my number one objective is to sell the home and if I thought a novice could tackle the home I would put only minor repairs needed (your probably not going to find a foreclosure that needs no repair at all). I had a foreclosure one time that was formerly owned by a former Royal's baseball player. The home was 8,000 or 9,000 sq ft and you would think a former major league baseball player would have the money to maintain and take care of their home but even that home needed work.
Now for the process. OK, now you have found the foreclosure that is not in too terrible of condition and you are wanting to purchase it. Here are some things you should know about the process that is different from your average sale. Understand that each bank and asset management company is different and each one has their own terms that your agent needs to go over with you in detail before making an offer. They normally use their contract which means their rules, if they use your agent's contract, they will have riders to that contract that trump any contradictions between the 2 contracts. This is just in general of what you can expect. First of all, it may take a week or more to get a response to your offer. This is absolutely normal in the foreclosure world and there is nothing you can say to make the bank move any faster. Do not try to get in a shoving match with the lender (unless you really don't want the house) the bank has no emotional involvement, unlike a normal seller. No contingencies, if you have to sell your home first, forget it. I have never worked with a bank that will take a contingency on the sale of your current home, the close of your home if it is under contract may be allowed. As is means As is. The lender will normally allow buyers to do inspections but will not do repairs, at all. If they were going to do repairs that they felt were needed to be able to sell the home, they would do those repairs before they list the property on the open market. Make sure to read your contract, some lenders make the earnest money non refundable no matter what and some contracts do not even allow you the option to back out during the inspection period. If you find things wrong and you want out of the contract, it could be tough luck for you. Also a lot of time the home does not have utilities on and some lenders will not turn them on for your inspections. Some contracts say that you are responsible to arrange for utilities to be turned on and you are also responsible for de-winterizing the property and re-winterizing after your inspections so check your contract. Be there when the water is turned on, if their is a plumbing leak, you are most likely going to be responsible for the damage it may cause.
Those are just some of the basic things I think will help the average buyer or agent who has never worked a foreclosure. Make sure you and your agent read all terms of the contract and addendum's and know what you are getting into a head of time. Your contract could be completely different then what I have explained, this is just a general overview of the foreclosure process but each transaction is different so make sure you are working with an agent who is thorough and familiar with foreclosure transactions.
Michael Pierce, Realtor - Prudential Kansas City Realty
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