If you’re house-shopping and looking for a deal, you might be interested in foreclosure properties. You probably know that it’s a little bit different and more complex than your average purchase, so you might be wondering how the process works.
The answer is, there’s no one-size-fits-all process when it comes to foreclosure properties. First of all, there are several types of foreclosures— pre-foreclosure or short sale, auction sale, REO, government-owned—and there is a variety of unique situations within each of these categories. Some are in good condition and the process is not too different from a traditional home purchase. Other properties have all kinds of issues.
Since we can’t outline the process clearly for you due to all these complexities, we’ve boiled it down to this: The first step in shopping for foreclosures is to understand the worst-case scenarios and to be prepared for anything. If you’ve never bought a foreclosure property and you’re thinking about doing so, here are some general beginner tips for you:
You’ll need some expert guidance.
The most important thing to do, is get a financial professional, an experienced real estate agent, and possibly a real estate attorney on your side. They’ll help you decide if a foreclosure property is right for you, financially and personally. They’ll be able to educate you in practical, legal, and financial concerns and help you avoid bad situations. The foreclosure market is complex, and you’re going to want a team of people who are on call to help guide you through potentially tricky situations. While some foreclosure sales go smoothly, more often than not, there are bumps in the road that can be handled much more efficiently by experienced professionals who have been through it all before. Don’t wait until you start encountering problems—get an experienced pro right away when you start shopping for a foreclosure. They’ll help you make smart decisions from the get-go!
You’ll likely encounter some obvious problems.
Foreclosures can have all kinds of unique problems that you won’t have with other types of properties. A house may look perfectly fine on the outside, but you might find some ugly, scary situations inside that will cost you a lot of time and money:
- Missing items: One major issue with foreclosures is that oftentimes, people who are in foreclosure situations will strip the house of any objects that they think they could resell—things like light fixtures, water heaters, furnaces, appliances, doorknobs and locks, and anything else they can remove from the property.
- Left-behind stuff: Or maybe the opposite has happened—the previous owners may leave furniture, personal items, or even piles of garbage lying around the property. Either of these situations will require extra effort on your part.
- Dirty: Depending on how long they’ve been vacant, foreclosures will probably need a very thorough cleaning—bugs, rodents, and simple dust and grime can invade a home very quickly without proper maintenance.
- Damage: It’s even worse if squatters, vandals, copper thieves, and trespassers have damaged the property.
- Unauthorized residents: We’ve even seen some situations where squatters were still in the residence and the new owners had to evict them.
- Deadly set-up: In foreclosure situations, it’s not uncommon for there to be dangerous (and potentially deadly) situations like cut wires or gas spigots left on.
These things don’t occur in every foreclosure situation, but they are not uncommon. It’s definitely something to be aware of before you even start shopping for a foreclosure.
There’ll also be some hidden problems, too.
Mold. Bad wiring. Structural problems. The list of things that can be wrong with a foreclosure property is endless. Lots of problems are obvious, but many are invisible and require a thorough inspection to uncover. You don’t want to be in the middle of a renovation before you find out about major issues. Things like mold, gas / electricity problems, and issues with the structure are unhealthy, unsafe, can cost you lots of money and time, and will disqualify you from an FHA loan.
Needless to say, it’s crucial to be aware of any potential issues as early as possible, so you’ll want to get an experienced and trusted inspector to look over the property. If at all possible, tag along with the inspector, ask questions and a voice your concerns, and make sure that they don’t miss a thing.
The process may take some time.
If you can’t be patient, the foreclosure market is not the right place for you. Complicated legal processes, mandatory waiting periods, mountains of paperwork, slow response times from lenders, and problems with the previous owners are just a few of the legal issues that can delay the process for weeks or even months.
Even if you’re successful in purchasing the property without delays, you must realize that not all foreclosed homes can be quick flips. Maybe you’re not planning on hanging onto the property, but what if there’s a major change in the market or your personal plans and you’re unable to resell the house quickly? Keep that worst-case scenario in mind when you’re shopping for a foreclosure and plan accordingly. Figure out what the property will cost you to maintain, if you’re unable to sell. Even if it seems like a slim chance, you never know what will happen in the future.
Foreclosures aren’t always a bargain.
Foreclosures can be a good way to get a great house for below market value. Unfortunately, though, the unpredictability of a foreclosure sale extends to the financial side of things as well. You have to be willing to take a financial risk. Even if you have experts on your side, no major issues crop up during the closing process, and everything is planned out perfectly, there’s still a risk of ending up upside down on the transaction. You will probably have to pay for any problems that come up, and you might even be responsible for debt connected to the home. Many times you won’t be aware of extra costs until closing or even afterwards, so be prepared.
However, they can be great investments in the end!
That being said, investing in a foreclosure property can be incredibly rewarding, whether you’re planning to live there or flip it for resale. If you decide to go for it, best of luck!