Buying a house in a Short Sale or Foreclosure
With hundreds of thousands of homes in foreclosure or on short sale lists, there’s never been a better time to score a sweet deal. But discount-priced foreclosures and short sales can come with a raft of expensive problems.
There’s a flood of properties on the market with lots of motivated sellers, says Jim Randel, real estate investor and author of “The Skinny on the Housing Crisis.” “The only people who are selling in a declining market are those who have to sell,” he says. But although they have to sell, you don’t have to buy. Know what you’re getting into before you buy a short sale or foreclosure property and be mindful of these five common mistakes:
1. Ignoring property problems
Most foreclosure property owners didn’t want to leave their house and because of that they’ll often take that frustration out on the property, says J. Scott Steinhorn, a real estate investor, with experience in foreclosures and short sales. Steinhorn has seen foreclosure properties where the previous owners clearly took a sledgehammer to the nice hardwood floors, the tiled showers and the cabinets, just to be spiteful.
Empty foreclosure properties may suffer from issues that arise from neglect — leaks, mold, termites, thieves, squatters and filth — because the property sat vacant for weeks, months or years before purchase. In addition, while short sellers are motivated to sell and repair their credit, they could have skimped on essential maintenance of the roof, furnace, air conditioner and hot water heater.
2. Skipping the home inspection
Clear your calendar and make time to tag along on your home inspection. This is the time where the house is open for all criticism and inquiries. Ask your questions of the Home Inspector, whatever they may be. Ask for repair estimates when an inspector notes a problem, or do some research online later that night.
Some buyers are even doing an inspection before making an offer. While most inspections are done after the initial offer, with the sale contingent upon mutual agreement of the parties, a pre-offer inspection allows house shoppers to walk away and find a better buy.
You may wish to call in specialized inspectors to look for expensive problems such as termites, mold or structural damage and get a full report and repair recommendations . Remember mold gets more expensive to remediate the longer you wait, and it can severely impact your health and the property’s re-salability.
3. Ignoring legal and insurance information
Because bank-owned properties often sell “as is” without disclosure, buyers need to do a little extra research on the home’s status. If the property is in a flood zone, you may pay thousands yearly in additional insurance costs, and you may find it difficult to resell the property, especially after Hurricane Sandy.
4. Leaving too little time
Short Sale and foreclosure home buyers need to be aware that the sale won’t necessarily close as quickly as it would for a traditional home. The short seller’s lender must grant approval of either foreclosure terms or a short sale price which is less than the short seller owes.
“Banks are taking huge losses so they are going to do their best to get their money back, get the most amount of money or go after the seller to try to recoup something,” DeSimone says. “They aren’t just going to let the house go.”
5. Falling hard for a bad home
Don’t assume you’re getting a great deal in today’s real estate market. Consider the house’s condition, inspection and price and ask yourself these common questions:
a. What if the home’s value drops another 20 percent, will you still feel satisfied with your purchase?
b. How much money will you have to pour into the property to make it habitable? If the problems are too costly, you might pass on this home purchase.
c. If you were to buy this property, could you afford to rent it out for as much as, or less than, your mortgage payment?
Sometimes home buyers love a house so much that they close their eyes to patent problems. In short, this may be the right time for you to buy a home, especially if you know what you’re getting into.