Over the past several years, many people have gotten great deals on homes because of foreclosures. While the inventory of foreclosed homes in the market is not nearly what it was a few years ago, there are still many to be found. In fact, in some areas, the foreclosures from the 2008-2010 period are just now making their way through the court system and appearing on the market.
In the right situation, a foreclosure can be an excellent way to obtain your dream home at a much better price than you would expect. Buying foreclosures can also be an great way to acquire investment properties, as many foreclosures are duplexes, triplexes, and smaller single-family homes that can become lucrative rentals.
Even though foreclosed homes can be a good deal, they definitely carry their own issues and risks that buyers need to be aware of. Let's break down a few of these and see if they should affect your decision on whether to buy the property or not.
Beware of "as-is" condition
I came across an ad when researching foreclosures that said "Cash offers only -- no showings and no inspections prior to closing. New owner is responsible for taking possession of the property upon closing." If you see anything similar to this, run! There is no telling what you'll find, or what kind of problems there are with the house, both physically and legally.
There are some other phrases to be extremely wary of. "Cash offers only" means the property is in such bad condition that it won't qualify for any type of financing. This happens with things like structural issues or if there are building code issues (old owners illegally turned a home into a duplex, built a pool with no permit, etc.), or something to that effect.
"As is" will hopefully be followed by the phrase "with right to inspect" or something similar. Never buy a home you can't go into before closing. When searching for my home, I was shown several foreclosures that had issues ranging from holes in the middle of the floor, to a toilet that backed up and overflowed years ago and was left to rot, to a family of raccoons living in one of the closets. If they won't even let you in, just imagine what they could be hiding!
This is especially common if you buy a property at auction. In some states, it can take years to foreclose on a home after the owners stop making payments. Generally, when the homeowners stop paying the mortgage, the property taxes don't get paid as well. The same goes for second mortgages and other liens that are placed against the house to recoup various debts.
Before making an offer on a foreclosed home, check with a real estate professional or with the local authorities (tax collector, records keeper, etc.) to see if any back taxes or other liens will complicate the sale.
Lack of maintenance
Routine maintenance is often neglected when houses are in foreclosure and the homeowners are no longer paying their mortgage. In addition, these foreclosed properties can sit vacant for years before new owners finally take possession.
As a result, it is fairly common to find critical maintenance issues that need to be handled immediately, such as plumbing issues, the need for a new roof, and an aging air conditioner. Foreclosed homes also have a higher rate of problems like mold or infestations that occur when a property is neglected for an extended period of time.
When making an offer on a foreclosed home, make sure you have the right to inspect. Call around to find a home inspector who has a lot of experience with foreclosures and their issues.
When a house sits vacant, it becomes a target for vandalism and theft. Don't be surprised if a home is missing cabinets, appliances, or other valuable items. A friend once put an offer on an older foreclosed home, and upon his home inspection, he found out all of the copper pipes had been stolen, leaving the home without plumbing.
In addition to vandals and thieves, the owners of foreclosed homes are known to take "souvenirs" from the house, especially appliances.
It's a good idea to get in writing exactly what property is going to convey with the house. If the property is indeed missing things, take this into account when submitting your offer.
Is it worth the discount?
The short answer is, maybe. While foreclosed homes generally sell for 15%-20% less than comparables, this is only a bargain if the work needed on the home is not too extensive, and the home inspection doesn't raise too many red flags.
When buying a foreclosure, work with a real estate professional, as they have been through the foreclosure buying process many times and know what is acceptable and what should scare you away.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.