The Number One Foreclosure Myth

“Foreclosures are cheaper.”I can’t tell you how many times I have heard clients tell me this, and although there are exceptions I have to say that overall this statement is false. In a market where foreclosures can be found around just about every corner in most areas, there are some myths surrounding the purchase of these properties that buyers should understand.

The biggest foreclosure myth is that foreclosures are less expensive, therefore affording a buyer a great deal. There is generally little truth to this belief. Here are the reasons why, and what you have to understand before jumping into the foreclosure home purchase game.

No disclosures provided. As the lender/owner did not live in the home they are (in most states) not required to provide standard disclosures to the purchaser. This means you may be in the dark as to big problems if you are not able to have the home inspected. Make sure you check with a local Realtor or attorney to understand your related real estate laws.

No home viewings. In many foreclosure sales there is not the chance to actually get inside the property. This typically is the case when the home is being sold at an auction. If you are not able to get inside a home you want to purchase of course you cannot know what potential problems await you.

No home inspections. To expand on the above, if you cannot get into the property neither can your home inspector. If this is the case you could be getting into something that is way over your head. I have heard of people who have bought these properties and found there is a cracked slab, or that the previous disgruntled homeowners poured concrete down the toilets before moving out. There could be a myriad of issues about which you will not be made aware before purchase.

“As is” purchase. In most foreclosure situations the home is sold “as is.” While all contracts in the state of California, for example, are sold “as is,” most sellers and buyers are usually able to agree for seller repairs or credit where issues are found subsequent to a home inspection. With lender-owners this usually is not the case. The lender doesn’t plan to issue any credits or make any repairs. You will be signing off on a clause stating these facts when you purchase the property.

Competing against other buyers, likely skilled investors. If you are buying the home at an auction chances are you will be competing against skilled investment buyers. I advise you to learn the auction process and be well prepared (there is a lot to know) before attempting to purchase the home at auction. This is especially true if you are planning on purchasing the home as your primary residence. Keep in mind that investor buyers are usually familiar with the process AND have teams of skilled tradesmen waiting to fix up the home in order to rent it out. It is a different ballgame if you are personally planning to live there, as the responsibility falls solely on you to fix any problems.

Possible insurance difficulties. Some foreclosure properties may be hard to insure, but this alone should not be a deterrent–just another point to consider in the case where you cannot view the property prior to purchase or cannot get a home inspection. I advise contacting your insurer first and finding out if it has any requirements as far as insurance goes on foreclosed properties.

Possible title problems. While any title issues HAVE to be rectified prior to closing, be aware that there could be title issues down the road. Keep in mind all of the lawsuits that are currently being filed against lenders in foreclosure cases surrounding the notion that the foreclosure may have been obtained illegally (the robo-signing scandal). This is especially true if you live in a judicial foreclosure state. You should speak with an attorney before buying ANY foreclosure property.

Note: It is important to note that the above points are merely presented for consideration and obviously do not apply in every foreclosure situation. In most foreclosure cases where the property is actively listed with a listing brokerage and placed on the MLS (multiple listing service) there IS room for negotiations, inspections and even possibly repair requests. In these cases it is likely safer to purchase a foreclosed property. Another benefit is that many lenders will clean, paint and even spiff up the property before listing it.

With all the potential issues involved in buying a foreclosed home you could end up paying a lot more in the long run than if you had purchased a resale home or a short sale property. Although short sale purchases can take a long time to complete, in most cases you are able to view and inspect the home, and ask the lender to consider repairs. Usually the bargaining power is high in these cases and you can get a good deal, but you have to be willing to wait most times for lengthy escrow closings.

There are always exceptions to the “great price” foreclosure myth, so if you or your agent can find a foreclosure property that truly is a gem at a great price, I say after doing your research you should buy that home and consider yourself very lucky. If you are insistent on purchasing one of these properties make sure you do as much research as possible, and consult with a Realtor. Be prepared when you make an offer–especially if you go to an auction–and be ready for the unexpected. Have your Realtor and/or attorney review your contract and understand all the potential issues involved with the sale. Best of luck!