“Ted, I really want to buy a Foreclosure.”

I swear, this day and age, I get this all the time from people. Everyone and their mother want to buy a Foreclosed property, but how many of them really know what it entails? Well, lucky for you, you just happen to know me! Working in the industry, I deal with them every day and can definitely shed some light on the situation.

First off, what is a foreclosure you ask?

A Foreclosed property is a “distressed property” that the bank owns outright and needs to get rid of ASAP. Bank’s are not in the game to get the absolute top dollar for their properties. They prefer to price aggressively to get them off their books and move on to the next one. Knowing this, it seems like a great chance to get a property well under market value. Sounds great, so what’s the catch?

When a bank finally obtains a Foreclosed home, it means the home has been vacant for awhile. From the time the owner missed his/her first payment to the time the bank officially took possession, about 13 months accumulate minimum. That is the absolute minimum and there are so many these days that the backlog is causing some properties to go as long as 18-24 months or beyond! That means that for 2 years, this home COULD HAVE been vacant, uncared for and abandoned.

Ok, so what does that mean?

This really all comes back to WHO the client is and WHY they are buying their property. Let’s look @ two different buyers and see how being a different buyer makes for a different situation.

INVESTOR

Within the Foreclosure market, there is a strong desire to “flip”. I mean, it makes perfect sense: Buy a beat up home on the cheap, rehab it and then sell it off @ a profit. Boom, too easy!

This is definitely the attitude of many investors and if Fannie Mae and Freddie Mac didn’t step in, they would be the sole source of all Foreclosure sales. These days, Fannie Mae and Freddie Mac put restrictions on their Foreclosure sales and allow only buyers that will LIVE in the home to submit offers during the first 15 days the home is on the market. These institutions want to promote homeownership and would love to sell the homes in the first 15 days to someone that will actually take possession and live in the home. Of course, that is not always the case.

After 15 days, if the bank has not accepted an offer, they open it up to everyone and then all the investors can submit their offers. Our current market is very attractive for an Investor in Real Estate:

  • Prices/Rates are at historic lows!
  • Inventory is high because buyers are still nervous about their money and the economy.
  • The mindset of today’s buyers is that they want to walk right in to a home and be awed.

A basic example of what an investor does is simple. They would buy a foreclosed home that they can grab for well under market value. They then have established tradesmen that rehab the property in a timely manner. Finally, they sell the property for around market value while making a profit.

The one benefit an investor has over a normal buyer is the financing aspect. A quick example would be a home that is a Foreclosure and listed @ price X. Let’s say that it has two offers; an investor giving 90% of X that can close in 2 weeks and a 1st time buyer offering 95% of X, but needing the standard 30-45 days to close because they are taking out a mortgage. In most cases, the bank will accept the cash offer and run with it. Again, bans want to get out with minimal risk as soon as possible.

FIRST TIME BUYERS

Most people that have never owned look @ the blueprint and think a Foreclosure is a perfect situation. Don’t get me wrong, there are always some decent properties out there that can fit every need, but other times, it is just not a good option.

1st time buyers are generally not going to want to do work. Looking in catalogs and watching HGTV, this generation of buyers wants everything done and attractive. Many buyers would rather spend more to have the home finished than spending less to do work themselves. There is absolutely nothing wrong with this mindset at all, don’t get me wrong. This generation’s buyers will pay for service.

Having prefaced it with that, most Foreclosures are going to need work and some a substantial amount. Recall earlier I said that some banks are taking 18-24 months to get the homes and then selling them. This means the Foreclosure you are looking at today may have been abandoned for 2 years or more! Within that time, the Chicago weather has beat it up and no one has cared for any aspect of it.

  • The lack of heat in the winter and cold in the summers have beaten up the home
  • The roof hasn’t been maintained and erosion of shingles will be evident
  • The plumbing hasn’t been running and pipes could be rusted/corroded
  • The electric/gas hasn’t been used so the HVAC/Water Heater may/may not work anymore
  • Water damage to the basement/roof/walls could have begun with no one to now
  • Windows could be broken and vandalism occurs on many occasions

There are obviously a ton of things that could have happened in 2 years. But hey, as an investor, who cares? They are going to gut everything anyway and make it look good. Most 1st time buyers on the other hand DON’T want to have to do what it takes to make the home habitable again.

Now again, there are some “handy” 1st time buyers that can see value and don’t mind doing upgrades, so it all comes down to what kind of buyer YOU are. Do you want to do work or would you rather have the work done FOR you? If you don’t want to do the work, maybe a foreclosure isn’t for you. Since the market has fallen off over the years, there are a lot of non-Foreclosures that could be options in your price point. I just don’t want buyers to automatically ONLY look @ foreclosures because of the prices. There is an old saying “You get what you pay for”. Just be careful prior to going out there.

I just like to educate my clients so they can have expectations prior to viewing homes. Again, every situation is unique and I have had clients buy Foreclosed homes and be satisfied. Unfortunately, I have also had clients buy a foreclosure and find out after the sale that the home wasn’t what they thought it was.

To surmise: let’s chat! Having a conversation with me can put us on the same page to develop our plan of attack going forward. Getting to know how I can help you find a home is the key to finding the home of your dreams. It’s a great time to buy and hopefully, you will allow me to help you in the process of Homeownership. I’ve been doing this since 2004 now and have gotten to really know the industry and all it entails. Buying a home is a pretty large investment, so don’t try to do it yourself. Feel free to check out my “Guide to Buying a Home“, which can walk you through the buying process.

Thanks for reading!

– Ted

This content is not the product of the National Association of REALTORS®, and may not reflect NAR's viewpoint or position on these topics and NAR does not verify the accuracy of the content.