What to put in my dome about buying a foreclosed home?
August 17, 2015 6:46 AM Subscribe
I don't know much about buying foreclosed homes and don't quite trust the top search results about it. So, I was hoping you could tell me: 1) How do I get started on looking at foreclosed homes that are available to buy? 2) Are home inspections usually good enough to catch major problems in foreclosed homes? 3) What else do you need to do to do this right?
Part of the reason I'm interested in foreclosed homes is that we've been priced out of the original areas in which we thought we'd like to live. I am open to the possibility that foreclosed homes are too risky, but I'd prefer to hear specific reasons why rather than just general fear or vague misgivings. (However, General Fear sounds like a pretty cool general.)
Part of the reason I'm interested in foreclosed homes is that we've been priced out of the original areas in which we thought we'd like to live. I am open to the possibility that foreclosed homes are too risky, but I'd prefer to hear specific reasons why rather than just general fear or vague misgivings. (However, General Fear sounds like a pretty cool general.)
You should definitely look on foreclosure.com but any real estate website will have an option to search for foreclosures. If you are buying in a depressed area, you should also look into special programs where you can get properties for near free (as long as you fix them up and move in yourself rather than use them for rental income), these properties should be listed or linked to on your local city government website.
As far as "special reasons". I have two rental properties, both bought foreclosed. As an example, the first property passed the inspection but as soon as the water got turned on, we discovered major problems related to frozen pipes from when no one was living in the house after it was re-possessed. It was expensive to fix these problems. We looked at another house that was trashed by the owners on purpose, apparently not an uncommon thing when someone loses their home.
So yes, there is a whole set of problems unique to foreclosures. But, they can be a great investment nonetheless. Good luck.
posted by rada at 7:06 AM on August 17, 2015 [1 favorite]
As far as "special reasons". I have two rental properties, both bought foreclosed. As an example, the first property passed the inspection but as soon as the water got turned on, we discovered major problems related to frozen pipes from when no one was living in the house after it was re-possessed. It was expensive to fix these problems. We looked at another house that was trashed by the owners on purpose, apparently not an uncommon thing when someone loses their home.
So yes, there is a whole set of problems unique to foreclosures. But, they can be a great investment nonetheless. Good luck.
posted by rada at 7:06 AM on August 17, 2015 [1 favorite]
I have a friend who bought a foreclosed home to live in (rather than rent out) about 8 years ago now in Malden. The inspection revealed some issues, but didn't catch some zoning-related issues that the city housing inspector found (I'm not sure why the housing inspector came out). The house was declared uninhabitable until the zoning issues were fixed - the previous owner had started building an illegal apartment in the basement and it all had to be ripped out - and he and his wife had to crash on a friend's couch for about three months while that all got fixed. They got the house for cheap, but they did have to put a significant amount of money and time into it to make it livable. (Anecdata, etc.)
As far as the housing inspection, we've gotten to a point where people are waiving housing inspection clauses in order to win bidding wars on homes. I'd be really wary of buying a foreclosure that also required waiving that clause - it seems like a recipe for disaster.
posted by backseatpilot at 7:18 AM on August 17, 2015
As far as the housing inspection, we've gotten to a point where people are waiving housing inspection clauses in order to win bidding wars on homes. I'd be really wary of buying a foreclosure that also required waiving that clause - it seems like a recipe for disaster.
posted by backseatpilot at 7:18 AM on August 17, 2015
In addition to Trulia and Zillow, you might want to check out Fannie Mae's own REO search site. REO, or "real estate owned" is also a good search term to use, that's the industry jargon for bank-owned properties. Fannie and Freddie's REO inventory has declined by more than half from its peak, however, and as you can see from the Massachusetts listing, a lot of the places which have REO inventory at this point are not necessarily the most desirable places to live.
A property only becomes REO, after all, when it cannot be sold on the open market for more than the mortgage is worth. Inside RTE 128, the vast majority of towns will be at or over their peak prices --- meaning new foreclosures are becoming extremely rare. The distressed properties still on the market are either in places where prices are still well below their mid-2000s levels (places like Springfield and Brockton, say) or where the original loan was so outrageously overpriced that with the penalties and late fees they're still underwater 10 years later.
When buying REO, you take the property as is, in general. No negotiating to get stuff fixed by the owner, and problems that crop afterwards will be on you. You will also likely be competing against experienced distressed property investors able to pay in cash. If you're not competing against investors, that's probably a warning sign --- that means they don't think they can buy the property, spend the bare minimum on repairs and upgrades, and profitably flip it. E.g., either it's over-priced for what it needs or there's serious expensive problems with it. There's a narrow window where something might not have enough margin to flip but still be cheap if you're willing to do DIY repair work...and it turns out there aren't any expensive hidden problems lurking.
There are quite likely to be problems with the property. If someone can't afford to pay their mortgage, they are unlikely to be able to afford to maintain the property. It's also likely that the property may have been sitting empty for a considerable time, which also tends to lead to maintenance problems.
You may have a bit better luck looking for short sales --- that's where the bank hasn't taken the property back yet but they're letting the owner sell for less than the mortgage is worth. Those are a bit trickier to find.
Also, Zillow's distressed listings in particular, AFAIK, are pretty unreliable. Whatever automated systems they use to put distressed listings up on the site don't have access to a lot of what's going on behind the scenes --- something can be listed as due for a foreclosure auction and then linger off-market for months if it's tied up in a court case, etc. A local realtor should be able to tell you more about a particular property if there's one you're interested in.
posted by Diablevert at 7:24 AM on August 17, 2015 [5 favorites]
A property only becomes REO, after all, when it cannot be sold on the open market for more than the mortgage is worth. Inside RTE 128, the vast majority of towns will be at or over their peak prices --- meaning new foreclosures are becoming extremely rare. The distressed properties still on the market are either in places where prices are still well below their mid-2000s levels (places like Springfield and Brockton, say) or where the original loan was so outrageously overpriced that with the penalties and late fees they're still underwater 10 years later.
When buying REO, you take the property as is, in general. No negotiating to get stuff fixed by the owner, and problems that crop afterwards will be on you. You will also likely be competing against experienced distressed property investors able to pay in cash. If you're not competing against investors, that's probably a warning sign --- that means they don't think they can buy the property, spend the bare minimum on repairs and upgrades, and profitably flip it. E.g., either it's over-priced for what it needs or there's serious expensive problems with it. There's a narrow window where something might not have enough margin to flip but still be cheap if you're willing to do DIY repair work...and it turns out there aren't any expensive hidden problems lurking.
There are quite likely to be problems with the property. If someone can't afford to pay their mortgage, they are unlikely to be able to afford to maintain the property. It's also likely that the property may have been sitting empty for a considerable time, which also tends to lead to maintenance problems.
You may have a bit better luck looking for short sales --- that's where the bank hasn't taken the property back yet but they're letting the owner sell for less than the mortgage is worth. Those are a bit trickier to find.
Also, Zillow's distressed listings in particular, AFAIK, are pretty unreliable. Whatever automated systems they use to put distressed listings up on the site don't have access to a lot of what's going on behind the scenes --- something can be listed as due for a foreclosure auction and then linger off-market for months if it's tied up in a court case, etc. A local realtor should be able to tell you more about a particular property if there's one you're interested in.
posted by Diablevert at 7:24 AM on August 17, 2015 [5 favorites]
I can only speak to this part:
Are home inspections usually good enough to catch major problems in foreclosed homes?
I am the one on here harping all the time about understanding the actual role of an inspector in most normal sales - don't tell either realtor who your inspector will be, stay with the inspector at all times during the inspection, understand what liability (if any whatsoever) inspectors have in your state if they end up ignoring a serious problem in order to get their kickback for just getting the sale to go through. That's not as big a risk when buying a foreclosure, mostly because banks are useless, but that doesn't mean that whatever inspection you get as part of the purchase process means anything.
NOT all inspectors are scam artists, but most states' requirements make it very easy to be, and even the ones that aren't don't actually have to be good at anything to be inspectors. Inspectors are mostly a formality for the mortgage, do not assume they give the first shit about you or your money or your future.
What you need is a general contractor, one you trust and who you pay out of your pocket by the hour (and generally intend to hire to handle any issues you decide to take on) to look at any serious contenders, as part of the look-see process, not as part of the buying process. If you were buying a racehorse, you'd bring your own vet. If you were buying a $200K car, you'd have your own mechanic look at it.
Have your contractor look at the property (performing their own inspection, basically, except actually mean it), and have them look at previous work permits and read the tea leaves there - remember 15 years ago when flipping first became all the rage? Now imagine the condition of all that shitty flipwork today. Don't forget this cautionary tale about predatory remodeling - not every foreclosure is just because people couldn't pay the mortgage, but sometimes people walked away because they couldn't or wouldn't pay for repairs.
posted by Lyn Never at 7:35 AM on August 17, 2015 [9 favorites]
Are home inspections usually good enough to catch major problems in foreclosed homes?
I am the one on here harping all the time about understanding the actual role of an inspector in most normal sales - don't tell either realtor who your inspector will be, stay with the inspector at all times during the inspection, understand what liability (if any whatsoever) inspectors have in your state if they end up ignoring a serious problem in order to get their kickback for just getting the sale to go through. That's not as big a risk when buying a foreclosure, mostly because banks are useless, but that doesn't mean that whatever inspection you get as part of the purchase process means anything.
NOT all inspectors are scam artists, but most states' requirements make it very easy to be, and even the ones that aren't don't actually have to be good at anything to be inspectors. Inspectors are mostly a formality for the mortgage, do not assume they give the first shit about you or your money or your future.
What you need is a general contractor, one you trust and who you pay out of your pocket by the hour (and generally intend to hire to handle any issues you decide to take on) to look at any serious contenders, as part of the look-see process, not as part of the buying process. If you were buying a racehorse, you'd bring your own vet. If you were buying a $200K car, you'd have your own mechanic look at it.
Have your contractor look at the property (performing their own inspection, basically, except actually mean it), and have them look at previous work permits and read the tea leaves there - remember 15 years ago when flipping first became all the rage? Now imagine the condition of all that shitty flipwork today. Don't forget this cautionary tale about predatory remodeling - not every foreclosure is just because people couldn't pay the mortgage, but sometimes people walked away because they couldn't or wouldn't pay for repairs.
posted by Lyn Never at 7:35 AM on August 17, 2015 [9 favorites]
2) Are home inspections usually good enough to catch major problems in foreclosed homes?
I can't speak to foreclosures, but home inspectors aren't always good enough to find problems with regular sales. I bought a house intending to renovate but ended up having to demolish and rebuild. As said above, you might want to have a contractor or structural engineer check out any potential houses.
posted by bondcliff at 7:40 AM on August 17, 2015
I can't speak to foreclosures, but home inspectors aren't always good enough to find problems with regular sales. I bought a house intending to renovate but ended up having to demolish and rebuild. As said above, you might want to have a contractor or structural engineer check out any potential houses.
posted by bondcliff at 7:40 AM on August 17, 2015
We bought a foreclosed house, and there were few issues. The inspection went fine. The house was in good condition and the former occupants didn't trash the place before they left - many of the foreclosed homes we had looked at had varying degrees of disrepair (copper pipes removed, appliances ripped out, severely damaged walls/doors/windows/etc.).
The inspection went well. Issues were minor. Everything easily fixable. We went to the house on the day of the inspection - I would HIGHLY recommend this. We received a LOT more detail than what was in the written report. Hire your own inspection agent - don't use the seller's. Don't use the one recommended by your real estate agent unless you really trust their judgment. Try and get the permit filings for your house (for construction work, etc) from your city to get a feel for what work was done.
Purchase agreement process was uneventful. Closing was uneventful. The real estate agent we worked with was through our credit union and she dealt with a lot of foreclosed homes and helped make sure a lot of the legal/paperwork issues were resolved. She also knew what homes were foreclosed in MLS - I know a local real estate website now has a checkbox to search for foreclosed homes specifically and it is much more reliable than Zillow.
What was problematic:
The title company did not file the appropriate paperwork with the county and we were required to go to court to transfer the title from the bank to our name. This was not at our expense, thankfully, but we were reluctant to do any major work on the house until this was resolved on the chance we would have to move. I'm pretty sure the title issue was a fluke and there were many other issues surrounding it - this is just the short version of what happened - but make sure to follow up on all paperwork that needs filing. We wouldn't have known about the paperwork not being filed if I hadn't followed up on a whim a few months after the fact.
The house had sat empty for over a year before we moved in. There were pests that needed to be dealt with indoors. Cleaning was harder to do than in a house that was just recently vacated. Dealing with turning the water back on and electricity issues may be problematic (or may be smooth sailing). Idiosyncrasies about the house (like the mystery light switch) are always going to be left unknown because we have no one to ask about what the deal is with any of them. We had service people come out to get things in working order because we didn't know how to check it out ourselves or know that things were functional and working (like HVAC, water heater, etc.). Yard/Landscaping was left mostly untouched for that year, so there were bugs/pests/a great big mess that needed tending to outside as well. It was a lot of work to make it livable and move-in ready, and this one required the least amount of work out of all the houses we looked at. This will vary, of course.
The former owners did not pay their bills and I have been hounded by bill collectors looking for the previous owners. This is a minor annoyance, but be aware of this and keep your state attorney general's information handy to report them if necessary.
I don't regret buying foreclosed. I'd consider it again if the house was right and if the price was right.
posted by schnee at 7:43 AM on August 17, 2015 [1 favorite]
The inspection went well. Issues were minor. Everything easily fixable. We went to the house on the day of the inspection - I would HIGHLY recommend this. We received a LOT more detail than what was in the written report. Hire your own inspection agent - don't use the seller's. Don't use the one recommended by your real estate agent unless you really trust their judgment. Try and get the permit filings for your house (for construction work, etc) from your city to get a feel for what work was done.
Purchase agreement process was uneventful. Closing was uneventful. The real estate agent we worked with was through our credit union and she dealt with a lot of foreclosed homes and helped make sure a lot of the legal/paperwork issues were resolved. She also knew what homes were foreclosed in MLS - I know a local real estate website now has a checkbox to search for foreclosed homes specifically and it is much more reliable than Zillow.
What was problematic:
The title company did not file the appropriate paperwork with the county and we were required to go to court to transfer the title from the bank to our name. This was not at our expense, thankfully, but we were reluctant to do any major work on the house until this was resolved on the chance we would have to move. I'm pretty sure the title issue was a fluke and there were many other issues surrounding it - this is just the short version of what happened - but make sure to follow up on all paperwork that needs filing. We wouldn't have known about the paperwork not being filed if I hadn't followed up on a whim a few months after the fact.
The house had sat empty for over a year before we moved in. There were pests that needed to be dealt with indoors. Cleaning was harder to do than in a house that was just recently vacated. Dealing with turning the water back on and electricity issues may be problematic (or may be smooth sailing). Idiosyncrasies about the house (like the mystery light switch) are always going to be left unknown because we have no one to ask about what the deal is with any of them. We had service people come out to get things in working order because we didn't know how to check it out ourselves or know that things were functional and working (like HVAC, water heater, etc.). Yard/Landscaping was left mostly untouched for that year, so there were bugs/pests/a great big mess that needed tending to outside as well. It was a lot of work to make it livable and move-in ready, and this one required the least amount of work out of all the houses we looked at. This will vary, of course.
The former owners did not pay their bills and I have been hounded by bill collectors looking for the previous owners. This is a minor annoyance, but be aware of this and keep your state attorney general's information handy to report them if necessary.
I don't regret buying foreclosed. I'd consider it again if the house was right and if the price was right.
posted by schnee at 7:43 AM on August 17, 2015 [1 favorite]
Zillow is off with their foreclosure information. Houses in our neighborhood that are or will shortly be foreclosed on don't show; some of the ones they show in pre-foreclosure aren't (usually they were years ago, but aren't now).
Have plenty of spare cash for unintended repairs; a friend bought a foreclosed house and the inspection didn't show the dry cement mix the previous owners had poured down the pipes before moving out. Water wasn't on, so the inspector didn't run it to check that it was working, but when my friend moved in and turned on the water, she ended up with a 7k plumbing bill, including having to redo the line from the house to the main sewer line.
Schnee is right in that houses that have sat unoccupied do take a lot more work; our house was empty for a few years, and it took us about a year to fully evict all of the vermin. :(
posted by RogueTech at 1:03 PM on August 17, 2015
Have plenty of spare cash for unintended repairs; a friend bought a foreclosed house and the inspection didn't show the dry cement mix the previous owners had poured down the pipes before moving out. Water wasn't on, so the inspector didn't run it to check that it was working, but when my friend moved in and turned on the water, she ended up with a 7k plumbing bill, including having to redo the line from the house to the main sewer line.
Schnee is right in that houses that have sat unoccupied do take a lot more work; our house was empty for a few years, and it took us about a year to fully evict all of the vermin. :(
posted by RogueTech at 1:03 PM on August 17, 2015
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Does Zillow/Trulia serve the locations you're looking to buy in? They both allow searches specifically by foreclosures.
Also, see if you can speak with a realtor (or whomever) about your local multiple listing service (MLS). There might be a bunch of fake/commercial ones, but the real one will be a goldmine.
posted by griphus at 6:52 AM on August 17, 2015