Tuesday, June 14, 2005

Buying Foreclosure Homes

Dear Readers,
Regardless of the "hot" real estate market, there are lots of foreclosure homes on the market these days. I often get calls from people who want to buy foreclosure homes because they think they can buy them for pennies on the dollar, as they are led to believe... by, what I consider, somewhat false advertising.

The reality of dealing with foreclosure homes is not what most people have been led to believe. First of all, many of the foreclosed homes have been over-mortgaged. The only craze hotter than the home buying craze has been the lending craze. How many solicitations for re-financing your home have you received in the last year? Probably at least one per week.

If you really think about it, if a homeowner could sell their home for more than what they owe they'd do it... and keep the difference. This would certainly be better than getting kicked out of your home with nothing to show for it.

The truth is, most people owe more than what they would net (after paying off the mortgage and selling costs). So, what is happening is the banks are re-possessing the homes and trying to sell them for what is owed on the property. They are not trying to make a profit. They are just trying to recover their investment (plus legal fees to foreclose and sell).

O.K... so let's say you do find a foreclosure you are interested in and the price actually does seem to be a good deal. Should you jump on it? Maybe and maybe not. The next problem with foreclosures is that the banks make you accept the house in "as is" condition. That means they make no warranties or guarantees. They know nothing about the property and take no responsibility or liability for it. You've got to do alot of "due diligence" when buying any home but even more so with a foreclosure homes, because there is nobody to take responsibility if there are undisclosed problems.

The next problem is financing. Many foreclosure homes have maintenance and repair issues. I've actually seen foreclosure homes where the toilets and kitchen cabinets have been stripped. Bitter occupants take what they can and leave in the night. Anyway, the foreclosing banks don't want to spend the money to fix them up. They want to sell them "as is". This causes a problem when trying to get new financing. The "new" lender doesn't want to finance a home needing repairs... so you need to have a large down payment (or all cash) to make the deal work. Then you need more cash to actually make the repairs.

If you actually do have enough cash to buy a foreclosed home, you might consider looking for a "desperate" seller BEFORE foreclosure happens. You could probably buy the home for less from the seller than from the lender. If it actually goes through foreclosure, the lender now has the added foreclosure costs on top of their already high mortgage balance.

Every situation is different, of course. If you see a property you are interested in, I'd be glad to analyze and discuss some strategies on a case by case basis.

Have a great day!

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