Buying a Foreclosure, Part 1
We are frequently asked this question by home buyers who want to find the very best value in a home (rightfully so). We will make an important distinction up front. This article is directed primarily to military families looking to purchase a home as their primary residence which is a completely different animal from purchasing investment properties. While they may consider keeping the home after a PCS and converting it to an investment property, the two require a totally different mindset and analysis.
This article will address foreclosure, short sales, and pre-foreclosures. Each is defined below.
For our discussion, a foreclosure is a property that is owned by the lending bank following the legal process after payment default.
Let's examine how a bank or lending bank typically deals with a property that comes back to them as a result of a full foreclosure. Government regulations require the bank reserve an amount of money equal to the value of the loan against the property. This is money that cannot be freed up for further investment, thus costing the lending bank money. The bank basically does what most homeowners do when they wish to sell a home. They call a Realtor (TM). Generally they have an arrangement with a broker who will list all of the bank's foreclosures for a reduced rate. The Realtor (TM) then places the home in the local Multiple Listing Service and a sign goes up on the property. So, once a property has been through full foreclosure, generally it is marketed like any other property and there really is no "secret handshake" or list to find foreclosed properties.
Here are five important distinctions that make a foreclosed property different than a typical home sale.
1. You are negotiating with an unemotional bank, not an individual. Ultimately the bank will have a bottom line established by the officer or board. Whether or not the home sells does not directly impact an individual or their personal finances. And that bottom line may or may not be below market value.
2. Banks rely heavily on processes and procedures - which take time. Do not expect the negotiations and decisions to move quickly. As opposed to the conventional negotiations with individual sellers, negotiations will not continue past normal working hours or into weekends. Likewise, expect the bank to impose additional contract requirements such as specific disclosures and addendums that will further encumber the process.
3. Most banks will list and sell the property "as is." This term has specific legal meaning and may vary by state laws and traditions. It may mean that the bank requires the purchaser to sign a disclosure or addendum that precludes negotiations based on a home inspection and / or the traditional pre-settlement walk through inspection. So, before you sign a contract on a foreclosure property, you may want to seek permission from the bank to complete the home inspection before making the contractual offer.
Foreclosures are truly a sad event and it is likely that the previous owner would not maintain the property in excellent condition during the process. Some angry owners may in fact inflict intentional damage to the property upon departure. You should also consider that some or all of the utilities may be disconnected. It is even possible that utility meters have been removed, which can be quite expensive to reinstate. This can obviously present additional concerns and expenses as water seals in plumbing may dry out, the home may have been without heat or air conditioning for a period of time. All of these circumstances can increase your costs.
5. Although it is hard to believe, some states have a "Redemption" law. This law allows previous owners to "Redeem" their home -- even after the sale by paying off their debt. Each Redemption State may have different laws. You should do very careful research on this aspect of buying foreclosures, and consult an attorney, before you write the contract.
Because of the soft market in many parts of the country, foreclosures are getting considerable press. We should acknowledge the human cost of a foreclosures as they cause good people a great deal of pain -- including some our military families. And if you find yourself in this situation due to PCS orders, we encourage you to help us document this situation on our VR SAM blog at http://vrsam.blogspot.com/.
We believe military families should not suffer great losses or be excluded from the American Dream of homeownership because of their service and are making our best effort to inform policy makers of this unacceptable situation.
Visit VR SAM at WWW.VRSAM.COM or call us at: 877 878-7726.
As a free service for our Military Families, we invite you to find your new home or list your home (sale or rent) at: WWW.MORESAM.NET
We also encourage you to join VR SAM's effort in improving Military Homeowner Benefits by blogging us at: http://vrsam.blogspot.com/