Buying a Foreclosure Property
Many people are attracted to the idea of purchasing a foreclosure property, and there are still properties that are being sold as foreclosures. Before embarking upon your search, it’s worth knowing what you can expect and what to look out for.
Frequently Asked Questions
Why would I want to buy a foreclosure property?
In general, foreclosures represent the lowest-priced homes on the market. If you are prepared for a transaction with some ups and downs, and are able to complete minor (or major) repairs, a foreclosure might be for you.
What are the pitfalls of buying a foreclosure?
The seller (the bank) is selling the property ‘as is’, which means they don’t offer any of the usual warranties and do not intend to make any repairs. There may be significant costs to the buyer in order to get the home up to standard – make sure you factor these in when making your offer. Also, the transaction itself can be less predictable than a traditional resale; be prepared for a few ‘speed bumps’ when the seller is a large corporation like a bank.
I heard I can ‘steal’ a home in this market. How much lower than the list price can I offer?
The reality is that banks are pricing their properties to attract multiple offers and create a bidding war between buyers, so most of the time, the listed price of a foreclosure represents a ‘steal’ already. The low prices also attract buyers, and it is very common to find that yours is not the only offer. In fact, most foreclosure homes sell at the list price, or higher. Expecting to knock 10 or 20% off the price often ends in disappointment. Work with your Realtor® to establish current market value and make your offer strong from the outset. That way, you stand a better chance of acceptance before additional offers reach the seller and create a bidding war.
What’s the difference between a foreclosure, a short sale and a lender-owned home?
Foreclosures, also referred to as ‘bank-owned’, ‘lender-owned’, ‘corporate-owned’ or ‘REOs’ (real estate-owned) are wholly owned by the bank, who has repossessed the property through the foreclosure process. Short sales are still owned by the individual seller and they require their lender’s permission to sell the home for less that the amount of the loan still outstanding.
Does ‘as is’ mean I can’t inspect the home and have to take it no matter how bad the condition?
‘As is’ reflects the bank’s intention to sell the home without warranties or repairs. However, buyers are still encouraged to conduct their own inspections, and if desired, to buy a private home warranty for at least the first year of ownership. If, during your inspection, you discover a major defect, you will almost always still be able to cancel and receive a refund of your earnest money.
Buying a home with multiple offers on it sounds like a hassle – why would I want to do that?
More and more we find that the best foreclosure homes receive multiple offers – usually very soon after hitting the market. Unless you are happy to limit your home search to less aggressively-priced listings, you should be prepared for multiple offer situations. As long as your Buyer Specialist has provided you with information to establish current market value, you need not fear over-paying in the case of a bidding war. In order to snag a bargain, you may find multiple offer situations unavoidable.
How can I be sure I win a bidding war?
Working with a Buyer Specialist who is familiar with structuring an offer to give you the best chance of success. While most banks prefer cash offers, there are various ways to strengthen any offer, aside from just increasing your offer price. There are no guarantees that even your strongest offer will be the winning bid, but an agent experienced in foreclosure transactions can maximize your chances by helping you offer terms that appeal to both you and the seller.
What is the process for buying a foreclosure?
Work with your Realtor® to find the right home for you, establish value and place your offer. You may wish to have one or two ‘back-up’ properties in case your first choice does not work out, for instance in the case of a multiple offer situation. Make sure you are pre-qualified for a loan, or have proof of funds in the case of a cash offer, as the offer will most likely not even be considered without.
The bank (seller) will usually take two or three days to respond, longer if you offer below the list price or your terms are less than favorable. If there is more than one offer on the home, you may be invited to make your ‘Highest and Best’ offer, which is your last chance to win the purchase.
If your offer is accepted, your agent will normally receive a brief email or verbal acceptance from the seller’s agent. Within a day or two (maybe longer), the seller will send over their own paperwork, which may be in the form of an addendum or counter offer to the purchase contract your offer was written on.
You can expect the seller’s paperwork to be a standardized document containing various disclaimers and waivers regarding the property condition and your rights as a buyer. Your Realtor® will check that the new documentation reflects the material terms of your agreement, and clear up any discrepancies. It is very unusual to obtain the seller’s agreement to change any of the terms of their standard paperwork, unless there is an error, and most of the time banks take the attitude of ‘take it or leave it!’ If your agent is experienced in representing buyers in foreclosure purchases, many of the potential issues can be pre-empted and avoided up-front, potentially saving buyers thousands of dollars.
Once you sign and return the seller’s paperwork, the seller will review it and sign (‘ratify’ or ‘execute’) the complete contract – again, this may take several days. At this point escrow can be opened and your earnest money deposited with the title company, although it may be possible to open escrow early and get a head start. Your inspections and appraisal can begin once the ratified contract is received, and any issues should be raised before the inspection period ends.
From this point, the transaction can expect to proceed much like a regular resale contract, although, since we are dealing with large corporations and not private sellers, we can expect a few more hiccups along the way!
Who pays for the utilities to be turned on?
The seller should ensure utilities are on for your inspection and final walk-through, however there may be cases where the seller refuses to do so like in HUD foreclosures. In this case, it may be necessary to obtain the seller’s permission for the buyer to turn utilities on in their name.
What’s a ‘per diem’?
Most banks impose a fine of $50 to $100 per day for every day the buyer is late closing, unless the delay is on the seller side. This is usually non-negotiable, so it is wise not to over-estimate how quickly you can close when making your offer.
What delays could I expect?
Due to the size of the organizations selling foreclosures, delays are usually related to bureaucracy. There may be issues in getting signed paperwork returned, agreement to repairs and occasionally problems with title. The most successful and satisfied buyers expect the unexpected!