Foreclosures- are they for you?!

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Real Estate

There is an undeniable allure of foreclosed properties to real estate buyers; After all, there are plenty in our local market that are in decent shape and they are sold for less than market value. So why aren’t more people buying foreclosures?

It boils down to 2 major sticking points-

1) the out-of-pocket expenses and

2) the lack of buyer control over deadlines and potential closing delays

So what kind of expenses are we talking?
     There’s the traditional costs- usually $1,000 in earnest money (this is money the seller holds during the sale and will keep as damages if you break the contract outside of certain terms. If you complete the sale, or terminate within the terms, if goes back to you) and $300 +/- for a home inspector. This starts our out-of-pocket expenses at $1,300.
     Foreclosures may not have the utilities on while listed for sale, so before your home inspection, YOU will have to pay to activate electric and water. The cost will vary by the company that services the home, but let’s say this is a $400 expense. It’s also recommended to have a handyman on call when utilities are activated in case there are any problems such as a leak or a short circuit wire. Paying the handyman to make the repair so the inspection can be completed would also be out of your pocket. Running total is now about $1,700.
     If the lender requires repairs on the home as a condition of the loan, you may have to walk away from the property as the majority of foreclosures are sold exactly as-is. A VA foreclosure (meaning it is owned by the VA, not that you are necessarily a VA buyer) will consider repairs, but you must provide 2 work quotes along with the repair request. If the repair is accepted, they will now change the purchase price to add the expense of the repair to it (ex- home is $150,000 but needs $2,000 in roof work and the foreclosure manager accepts the repair request. You would now be buying for $152,000).
     Another traditional expense is closing costs and pre-paids. In our local market, it is traditional for the seller to pay all or most of these expenses; However, on a foreclosure, they will only pay 3% of the *financed* purchase price in closing costs. Depending on a few varying factors, this is only about 60% of the cost, leaving you owing the other 40% at closing. There isn’t a “typical” expense we can use for this as closing costs are influenced by purchase price and location, but let’s continue to use the example of a $150,000 foreclosure on ¼ acre in Hinesville with 100% financing. You would be looking at about $3,000 on the buyers side to pay the remainder of closing costs.
     All said and done, before you even own the home, buying a foreclosure has cost you $1,700 plus your share of closing costs up front. Using our example, this would be $4,700 out-of-pocket and excludes any down payment your loan may require!  But there is one last expense- you will not receive keys! The foreclosure agent will give you access after closing, but you will either need to rekey or replace the locks.

You’ve been saving up money and you’re okay with the out of pocket costs, what kind of timelines and delays are anticipated?
     First and foremost, understand that ALL timelines are set by the foreclosure company. Sales are done by their rules. You must have earnest money to their agent within 24 hours of notice of an accepted offer. They will dictate how much notice you must provide the seller before having utilities restored and will even say how many days they are allowed to be restored for! They will pre-determine how many days due-diligence (inspection period) you are permitted. And if for any reason the sale does not close on the date it was contracted for, you have to pay the foreclosure company to extend the closing. In addition to paying them, you may also have to pay your lender for a rate-lock extension on your interest rate.
     Speaking of not closing on the contracted date, foreclosures often have problems with title-work/ownership records that create a delay in closing. Yes, you will still have to pay for an extension in this case. Delays can range from a few days, to a few weeks, to even a few months. I handled a foreclosure sale in which we had a very involved attorney and his paralegal pressing the foreclosure company to get their paperwork straightened out and it still took 77 days under contract before something was worked out between the attorney, lender, and foreclosure for my buyer to close on the property.

Are there ever any exceptions?
      A few. Generally speaking, these are limited to VA foreclosures…
      A home can be foreclosed and sold by the VA. Meaning the VA has ownership of the house and is selling it. You do not have to be a veteran to buy a home being sold by the VA! These transactions are a little easier as they will consider repairs (only the major stuff, especially if the lender requires it) and they will turn on utilities for you.

Long story short
     If you have an acceptable amount of liquid assets to put toward the purchase process, are available to meet deadlines, are not in a rush to close by any particular date, and like the possibility of some sweat-equity, then a foreclosure may be for you! Give me a call to discuss some of the finer details and I can get to work for you. 😉
     If you've realized a foreclosure is not for you, thats okay, too! We are lucky to have a market with plenty of inventory to choose from. Give me a call to talk about what you're looking for and I can jump in and help you move the process forward.