Just about everyone has heard about buying foreclosures as a get rich quick scheme. There are ads all over the place talking about how much you can raise your net worth by buying foreclosures. While this is definitely true it leaves out a lot of the pitfalls you can face when attempting this strategy.
Buying a foreclosure is a way to build wealth quickly but it can also be a way to dig a deep hole. You have to be aware of the problems that can come from buying a foreclosure. I’m going to list some of the reasons that make buying a foreclosed property risky and hopefully, it will help you avoid making any costly financial mistakes.
Property condition problems
While purchasing a foreclosure may come at a huge discount compared to buying a regularly listed property. Foreclosures mostly come in “as-is” condition which can sometimes be pretty rough.
When a home is foreclosed on, the bank normally turns off the power and this can become a problem. You need airflow to discourage mold from growing. So if the home is sitting vacant for years, there is a big possibility there is mold in the home. Be prepared to do a lot of cleaning, and possibly some reovations.
If the home hasn’t sat vacant for years on end and is still being occupied by the previous owners. It will most likely be poorly maintained. The previous owners couldn’t pay their mortgage so they most likely don’t have the money to keep up with regular home maintenance.
Also, owners can become very frustrated due to the foreclosure process and take their anger out on the house. This can result in missing appliances, holes in the wall or much worse.
To make life even more complicated, most foreclosures are sold “as-is” and the bank doesn’t allow you access inside. This can make your purchase a real gamble.
Personally, I’ve bought two foreclosures and both of them were home run deals, so the deals are out there. You just have to do every bit of research you can before making an offer and price in as much risk as you can.
Hidden Fees
When purchasing a foreclosure the purchase price of the home may be low but often they come with hefty fees.
Behind on taxes
The home may be multiple years behind on property taxes. The taxes will have to be brought current by the buyer and this can add up to a lot of money. I absolutely recommend finding out how much in back taxes are owed before making an offer on a foreclosure. The home’s local tax assessor’s office should be able to answer any property tax-related questions you might have.
Transaction fees
The auction house, foreclosure company or selling bank may charge individual fees that can be thousands of dollars. You need to find out exactly how much in fees you will be paying before making an offer. An offer for $30,000 can easily become a $37,000 purchase once you add in fees. These numbers are pretty much spot on for the last house I bought using Auction.com.
Liens against the property
Another thing to look out for with foreclosures are liens. These are loans against the property that the previous owner didn’t pay. If the property is being sold by a bank they usually take care of any existing liens against the property. This is something you would have to get an attorney to research and I would highly recommend buying title insurance when possible.
Slow Process
Depending on where you purchase the foreclosure, you may win the auction but find yourself waiting weeks for approval from the selling bank.
I had this happen to me personally after purchasing a house using Auction.com. It took over a month for them to approve our offer. I have a friend that has bought multiple houses at the “courthouse steps”. He said that he got his deeds within a week. As you can tell, this timeframe can vary wildly.
In addition to the seller or auction adding time to the process, the closing may also take longer than normal too. There are many additional documents that go along with a foreclosure closing and this usually makes the process take longer than normal.
Competition
Competition is probably not the first thing you think of when you think of the word Foreclosure. The competition for foreclosed homes is definitely there though. Not only will you have potential new homeowners looking for great deals, but you will also get investors with deep pockets trying to find their next flip.
Foreclosures are often priced very attractively to drum up a bidding war. When word gets out and investors in the area get involved, it can turn into a feeding frenzy. If the home you are looking at gets discovered by multiple investors, your numbers will have to be very accurate to get a deal. If you overestimate repairs by $10,000 another investor will come in with a slightly higher offer and scoop up a good deal.
All in All
Foreclosures can be very attractive if you just look at the list price but a lot more goes into buying a foreclosure than just the list price. If you run the numbers, factor in potential problems, account for delays, and are ready for a lot of work buying a foreclosure can be an amazing investment opportunity.
FAQ
Yes, Often time banks or auction sites will tack on extra fees. Carefully keep track of your numbers because there may be more fees than you initially expected when buying a foreclosure.
Believe it or not, foreclosures have a lot of competition. Investors love to find good deals and foreclosures are a great way to do that.
Yes, some liens will remain with a property after it has been purchased at a foreclosure auction. Check out my personal experience with this here!
Typically buying a foreclosure can be harder than buying a traditional property off the MLS. Foreclosures are usually being sold by banks and they are notorious for making things take longer than they should.
