Buying a home is a major investment. In many circumstances, it’s the largest one that many people will ever make in their lifetime. It stands to reason, then, that finding ways to make such a massive purchase as affordable as possible. One method is to buy a foreclosed property, but there’s a lot that goes into this process; most people aren’t familiar with what it takes to find foreclosed properties, much less purchase one - and even fewer know the risks involved.
That’s why today we’re turning to the experts. We talked to licensed real estate broker Christina Prostano, founder and principal agent of CP Global, who has been working the Manhattan and Brooklyn real estate markets in New York City since 2005. Below, she shares information about the recent history of property foreclosures, different types of foreclosed properties, what it takes to buy one, and whether you should consider committing to such a purchase.
Being able to purchase foreclosed properties was always a possibility, but in modern contexts, it’s become easier than ever before. Christina relates how the aftermath of the mortgage crisis in the early 2000s, it’s become much easier and less intimidating to purchase foreclosed properties. Prior to this, “you needed access to special lists, or maybe know someone in the industry,” Christina says. “Auctions were very intimidating, because you were often not allowed to see the properties up close, and you took the risk of what you might get, well, competing against professional, flippers, contractors, and other experts.”
That’s why, in the past, Christina and CP Global used to steer her buyers clear unless they had prior experience in buying foreclosed properties. Today it’s much different, however. Finding properties in one of the stages of foreclosure is often as easy as looking through a simple Zillow search. Additionally, there are websites designed to provide anyone interested in purchasing a foreclosed property with the opportunity to do so. There are even real estate brokers who focus strictly on this segment.
Christina says that one of the best opportunities is at the earliest stage of foreclosure. “Public records indicate when a bank has served notice that a property is in default, but before it goes to auction,” Christina says. “If you can connect with the seller directly, there is a chance you can score a deal, well saving them the expense and uncertainty of going through foreclosure, also sparing them the negative implications on their credit.” These are often called short sales, and they’re just that - when a lender accepts a shortfall in the amount that is owed on the home. When owners face financial hardship, they may be able to organize a short sale and get the bank to agree to accept a price lower than the amount of the loan.
If you’re not looking for a short sale, though, you’ll need to purchase a foreclosed property at auction. These auctions occur when a home has been taken into possession by the local authorities, a bank, or even the government, and these entities have no interest in maintaining it. Christina says this happens quite often, as banks and governments are not in the business of home ownership.
Buying properties that are going through the foreclosure process represents opportunities to buy those properties for well under market value. Yet there are some caveats to this process. In the event of short sales, the entirety of the process can be very long and drawn out, as well as carrying a large amount of uncertainty. “These sales can be slow,” says Christina, “and you are at the mercy of the bank. Sometimes there will be an understood number at the bank is likely to accept, but all offers are subject to bank approval before the sale can take place.”
Meanwhile, buying foreclosed properties at auction isn’t necessarily less problematic. Availability is quicker, but that quick pace also carries high risk; there is more room for error and making mistakes such as overpaying, purchasing a problem property due to neglect or damage, or other risks. The upside is that you’re gaining access to a property that’s been heavily discounted, of course, but doing so could result in having to deal with hidden costs.
The price of any piece of property is going to be a massive investment, whether it’s a foreclosure or not. It’s true that foreclosure properties do represent major cost savings in ideal situations where there’s no damage or neglect to the property that you’ll have to contend with. However, foreclosed properties typically aren’t pristine and move-in ready. Many come with problems, and in cases such as when you purchase at auction, you don’t know what you’re walking into. Even short sales represent challenges when these properties are sold “as is” and the buyer - you - would be responsible for any maintenance and repair.
Still, for the experienced investor, or one who’s prepared to weather the possible issues that go along with buying a foreclosed property, there are plenty of opportunities. Christina recommends you speak with an expert in your local market about whether or not this type of home-purchasing process is a good fit for you, and be sure to talk to a mortgage broker, in advance, about the type of program you might use in order to borrow money for this kind of purchase. The more research you do into buying a foreclosed property, the better equipped you’ll be to handle the process.