Buying foreclosed homes - could this be a great way to get into a principal residence or a rental investment property?
REO’s (or Real Estate Owned, meaning bank foreclosed properties and repo homes) can certainly result in a purchase at far less than it would normally cost to buy a traditional piece of real estate. But the transactions are not for the faint of heart!
You need to understand the way these sales are handled, then prepare yourself for some ups and downs!
A traditional sale is where a human seller – usually the occupant homeowner – offers a home for sale through a Realtor by placing it on the MLS. The seller has probably owned the property for years, has made some upgrades, some improvements, and performed maintenance on the property.
In turn, the seller is obligated by law to disclose any issues on or around the property which may affect its desirablility, marketability, or utility.
Foreclosure homes, on the other hand, are homes where the owner has defaulted on their mortgage obligations and the bank has regained possession of the home through legal action.
We will not be covering the mechanism whereby the bank takes ownership of the home. In this article, we will be discussing the purchase of a foreclosed home after the bank has ownership and wishes to sell it on the open market – usually through the MLS and always through a Realtor.
In a foreclosure, you are not dealing with a normal Seller. The lender merely loaned money to finance the home. Neither they nor their representatives ever occupied it, improved it, insured it, or even saw it prior to taking ownership of the property. All they did was collect the monthly payment on the mortgage as per the terms of the note.
In addition, bank employees have no personal interest in whether the home sells or not other than in the performance of their duties. This can make them rather unmotivated sellers!
And even though banks hate to admit it, this is not what they are good at doing. I have seen banks make incredible mistakes that only end up costing themselves money, but they can also frustrate and chase away a perfectly good Buyer in the meantime.
Also, banks do not have the same burden of disclosure that typical human owners have.
Banks, unlike human sellers, do not have the obligation of providing the buyer with a RETDS – a real estate transfer disclosure statement – describing which systems are in good working order and any issues with them in the past. They don’t even have to disclose which systems are presently on the property. I heard of one foreclosure transaction where the home was sold without a furnace!
Banks also don’t have to provide the Buyer with a Supplemental Property Tax Notice, a Natural Hazard Disclosure Statement, a notice of a Mello-Roos District Lien, or a Guide to Earthquake Safety – all required of Sellers in a traditional real estate transaction.
Make you feel a little vulnerable? Well, perhaps you shouldn’t.
Banks DO have to operate in a non-deceitful manner and must disclose all material facts known to them. They must disclose the existence of seismic zones, fire hazard areas, and special studies or flood zones that may have an effect on the property if they are aware of them.
This simply means that you and your Realtor must make a thorough and complete investigation of these any any other issues you feel may be important.
And depending upon how much the bank wants to get the property and its non-performing mortgage off the wrong side of its balance sheet, you may be able to negotiate a contract at a price far lower than if it were a traditional sale.
If you want a home in move in condition or if your family needs to find a home right away, buying a foreclosed home may not be the best deal for you. But if you have a little time, don’t mind a little work – and have a Realtor who is willing to put their experience to work for you, buying foreclosed homes may be a great way to buy your next home or rental property for investment!
