There are opportunities to buy foreclosed properties in most markets right now. But the question is, should you?
Let’s define a foreclosure.
When a property owner defaults on their mortgage, the property is headed for foreclosure. The process varies by State but in most cases, a period of time is allowed for the owner to redeem the property by bringing the payments current. If they can not do this, the property goes to a foreclosure auction and the highest bidder gets the property. Most often the mortgage holder (the bank) gets the foreclosures at auction. So, very likely a private buyer who buys a foreclosure will be buying an REO – Real Estate Owned (by the bank) who got it at auction.
For the average buyer, purchasing a REO is safer than being the highest bidder at a foreclosure auction. There will be no liens, no back taxes and no owners or tenants to evict.
There are five realities when the purchase of a REO property is a consideration.
1. 1. The purchase price will not be “dirt cheap”. Way below fair market value for REOs is the exception, not the rule, because banks will take only so much of a loss, if any.
2. 2. Deferred repairs and maintenance, over a significant period of time, is usually a condition in foreclosed properties. The good news is that bank owned properties allow a buyer to do home inspections to determine the extent of defects if any. An informed decision to proceed or not is critical for a successful purchase.
3. 3. There may be incentives offered by the bank in the form of closing cost reductions, more flexible down payments and maybe an interest rate break. This will be more likely when the REO has been available for awhile and if there are no competing buyers.
4. 4. A REO buyer has some time to consider an offer, research the area and not get caught up in the frenzy of the bidding that exists at a foreclosure auction.
5. 5. Good REO properties will have competitive interest from multiple buyers.
It might bear mentioning that there may be equally good, if not better, deals right now from sellers not facing foreclosure.