Foreclosures: Deal or No Deal?

Everybody loves a deal but foreclosures may not be the best deal for you.  Experienced investors carefully search opportunities before beginning a complicated foreclosure purchase and even they sometimes get burned.  If you are new to real estate with little money to spare -tread carefully.  

The dream of “getting a steal” makes foreclosures seem attractive but look past the price. Most foreclosed homes are in terrible condition. Let’s face it when people lose their homes they don’t always leave graciously!  Plumbing, copper wiring, heating and appliances are sometimes removed with great damage. These homes are seriously neglected for a long time. 

All foreclosures are sold “as is”.  So, if you don’t have the experience or dollars to fix it up – don’t buy it!  Remember Shelly Long and Tom Hanks in  the movie the “The Money Pit”?  Foreclosures can be profitable especially if you are handy and ambitious, but it takes experience and diligent research on each property to minimize your risk before buying.

There are three ways to buy foreclosures:  

A Pre Foreclosure is when you purchase a home from a delinquent property owner before the bank has taken the house.  These motivated sellers usually owe too much on the house to sell below market value. Some but not all pre foreclosures are “short sales”. A short sale is when a homeowner owes more on their mortgage than what the house is currently worth and they approach the bank to accept the value of the house for full payment on their mortgage note. The home is sold short, thus the term “short sale”.   

A Foreclosure Auction is when you purchase a home at auction from the bank after they have repossessed the property. These auctions occur on the steps of Town Hall and are publicized in the legal notices in the newspaper. Sometimes you will hear an investor use the slang “I bought it on the steps” this refers to a foreclosure auction. This is most risky since inspecting the home is impossible and you may find yourself needing to evict people still living in the property after you buy it.  

 A REO purchase is when you buy a repossessed home from the bank after they have tried to sell it at auction and failed.   These “real estate owned” properties are then listed with a real estate agent.  This is the least risky way to buy a foreclosure.  These homes are priced to sell fast and available to be inspected before purchase. Many of them end up in a competitive bid situation as Investors with large pools of cash descend on these properties and offer bids that they can close very quickly sometimes within 2 weeks. Speed is important to the bank as is reliable funding. In those instances cash is still king!

In our neighborhood we have many foreclosures and short sales in every price range. Although not ample there are a few vacant properties all over Babylon Village from waterfronts on Lucinda Drive and in Blue Harbor to some smaller ranches and capes on our north side that will be coming on the market. They usually sell quick once they hit the market and most get more than one bid, so it is not likely you will get the deal of the century but you may find a good buy. 

In the months to come 2011 will bring many foreclosure opportunities to Long Island. Banks track the foreclosed homes that are going to be coming to market by the amount of defaulting home owners on their books. These homes are called “shadow inventory” because they are waiting in the shadows to come on the market once the bank forecloses on them.  

So if buying one of these properties interests you - do your homework and make sure the price of the house reflects the condition it is in.  When you factor in repair costs is it a deal or no deal?