WARNING: Why Buying A Foreclosed Home Is Not A Guarantee Of Savings

Sure it may be less expensive, but buying a foreclosed home is not for the faint of heart, nor is it for the novice home buyer. Potential problems could severely limit the cost savings you may have gained from purchasing a foreclosure rather than an existing or even a new home.

Is The Property Occupied?

If there are tenants (someone other than the prior owner) in the home and you plan to either move in yourself, or put someone else in, you will most likely be required to remove the occupants yourself.

The process may be as easy as sending a nice, formal letter in the mail notifying the tenants of the situation and giving them time to move out on their own accord. Then again, it may not. You may need to evict them, adding to the costs in terms of both time and money, especially if you need to hire council to get the job done.

Remember that it’s human nature. Sometimes tenants who are angry at the eviction will try to get even.

A resourceful method of removal might simply be to pay the tenants to leave. Yet more costs incurred that are cutting down on the savings you’ve gained thus far.

Condition of Foreclosed Homes

When you buy a used car that is in poor condition, many states have “lemon laws” which protect the buyer. This is certainly NOT the case with foreclosures. Since you buy a foreclosed home “as is” from either the lienholder or HUD you have no guarantee that it will be worth even what they are selling it for.

In some cases you can inspect before purchasing, however that’s not always the case. Often, when a homeowner realizes that they are going to lose the home, they may stop taking care of the home.

Sometimes the homeowner, if they are angry, will strip the home of everything of any worth, appliances, light fixtures, kitchen cabinets and even copper wires and pipes to sell as scrap. They may even flood the home which, even after drying out, can be an environmental hazard.

The Savings May Not Be As Much As You Think

Many foreclosures in the marketplace right now stem from the subprime mortgage market. Many of the buyers who obtained unconventional financing had little to no equity which means the lender may be attempting to collect very close to the full market value of the home, or perhaps a 10 percent discount which could very easily be eaten up by required repairs to the home.

Zalman Velvel, a Certified Commercial Investment member (CCIM), trainer, auctioneer and author based in Ft. Meyers, Florida has been in the foreclosure market for more than 20 years. He cautions foreclosure “newbies” about "land mines" they could encounter in the purchase of foreclosed property.

"You have to know how to do a title search or you could end up thinking you've just bought a home by paying off a $100,000 mortgage only to find out that was just the second mortgage and you have to pay another $200,000 to take ownership, advises Velvel.

"Suddenly that great buy isn't such a good deal. You also have to be aware of [any] liens on the property because you're going to be responsible for those as well."

Other possible problems include:

• Problems with financing - you will require a note from a bank or lender when you go to the auction. This letter will explain that you have the funds necessary for the sale. In many cases, however, a lender is unwilling to pony up the funds for property that his appraiser can inspect beforehand.

• Some states allow generous redemption periods for foreclosed homeowners. In Tennessee for example, a homeowner has up to two years to buy back their property. It may be possible for this redemption right to be waived so you will need to find out before putting in a bid.

• Unpaid liens against the property. This can be determined by having a title search done on the property. In addition to the obvious mortgage(s), liens are usually found in the form of unpaid taxes, homeowner’s associations, or contractor’s liens however sometimes assessments for public works such as street lighting, road widening, etc. can result in a municipal lien.

Despite the potential problems with foreclosures, it is possible to find a good deal. Professionals who make a living at buying and selling foreclosures advise the importance of doing your due diligence and vetting every home thoroughly before placing your bid.

As Velvel says, "If you're looking to live in a house, it's more important to find an area that you like than to find a good foreclosure deal. But then, if there are foreclosures in an area you like, buy the foreclosure."