Top 10 Myths About Buying a Foreclosure

Trulia.com and RealtyTrac recently surveyed U.S. adults to get some insight into what people *think* is involved with buying a foreclosure. Here are the Top 10 Myths that came up, and the facts to set the record straight:

Foreclosures need a huge amount of work.  92 percent of consumers expressed that if they bought a foreclosure, they would be willing to make home improvements after they closed the deal, with 65 percent being willing to invest 20 percent or less of the purchase price.  Although stories of foreclosures missing plumbing and every electrical fixture are very memorable, many foreclosed homes need only the (relatively inexpensive) cosmetics that many new homeowners want to customize no matter what kind of home they’re buying: paint, carpet, etc.

Foreclosures sell at massive discounts, compared to other homes.  Almost every member – 95 percent – of the surveyed group expected to pay less for a foreclosed home than for a similar, non-foreclosed home; 18 percent had realistic expectations of less than a 25 percent discount.  However, 36 percent expected to receive a bargain basement discount of 50 percent or more off the value of a similar non-foreclosure.  Reality check: while foreclosures might be discounted massively from what the former owner paid or owed, their discounts are much more modest when compared to their value on today’s market and the prices of similar homes.

Buying a foreclosure is risky.  49% of respondents said they perceived buying a foreclosure as risky.  And yes – buying a foreclosure at the auction on the county courthouse steps can have risks, including the risk the new owner will take on the former’s owner’s liens and other loans.  But most buyers looking for foreclosures are looking at bank-owned properties, which are listed on the open market with other, ‘regular’ homes.  Buying these homes is really no more risky than buying a non-foreclosed home.

You can’t get inspections on the property when you buy a foreclosed home.  County auction foreclosures don’t often offer the ability for buyers to have the homes inspected.  But virtually all bank-owned properties for sale on the open market not only allow, but encourage buyers to obtain every inspection they deem necessary. This is because almost every bank sells their foreclosed homes as-is, and they want to avoid later liability.  It’s in everyone’s best interests to make sure that the buyer has full information about the property’s condition before they close the deal.

There are hidden costs to watch out for when buying a foreclosed home.  Sixty-eight percent of survey respondents who felt there is a negative stigma to buying a foreclosure expressed  the concern that buying a foreclosure poses the danger of hidden costs. At some foreclosure auctions, there are buyer’s premiums and other hefty fees that can really add up and take a chunk out of the effective savings the buyer stood to realize. However, when you buy a bank-owned property that is listed for sale with a real estate agent, the closing costs are the same as they would be if you bought a non-foreclosed home. Overdue property taxes, HOA dues and other bills left behind by the defaulting homeowner are cleared by the bank that owns a foreclosed home before it is sold on the market, though these items should be watched out for if you buy a home at the county foreclosure auction.

Foreclosures are more likely to lose their value than “regular” homes. Thirty-five percent of U.S. adults who believed there are downsides to buying foreclosed properties believed this myth. In fact, because foreclosures often offer a discount from the home’s current market value, they may offer some degree of insulation from further depreciation.  Whether a home loses its value or not has to do with the dynamics of the local market, including the area’s supply of homes, demand for homes, interest rates and the health of the employment market – not with whether the home was or was not a foreclosure at the time it was purchased.

Most foreclosures happen when homeowners just walk away.  Out of homeowners with a mortgage, only 1 percent said walking away from their home would be their first choice if they were unable to pay their mortgage.  And a whopping 59 percent of mortgage-holders said they wouldn’t walk away from their home – no matter how upside down they were on their mortgage. Most foreclosures happen when the owners lose their jobs or their mortgage adjusts to the point where they absolutely cannot pay the mortgage, no matter how hard they try.  Voluntary ‘walk-away’s are simply not as popular as many people think.

When you buy a foreclosure, you should lowball the bank – they are desperate to get these homes off their books.  Stories about in the press abound about the large numbers of foreclosed homes the banks have on their books.  We’ve all heard the adage that banks have no interest in owning these properties.  But the real deal is that they’re simply not desperate enough to give these places away.  Also, the banks mostly service the defaulted loans – they don’t own them.  Various groups of investors do, and they hold the banks accountable to selling the bank-owned property at as high a price as possible, helping them cut their losses.  Many banks won’t even consider lowball offers, and many bank-owned properties actually sell for above the asking price.  Before a bank will take a lowball offer, they will almost always reduce the list price first, and see if that attracts a higher offer than the lowball one they have in hand.

You need to be able to pay in cash in order to buy a foreclosure.  Again, if you buy a foreclosed home on the county courthouse steps, you might need to bring a cashier’s check and be ready to pay for the place on the spot.  By contrast, bank-owned homes are bought through a more normal real estate transaction, which means buyers can obtain a mortgage to finance the home just like they would if the home weren’t a foreclosure. It is true, though, that in some markets, banks prefer offers from cash buyers, but this tends to be in situations where the property’s condition is pretty dire, and the bank knows this may make it hard for a buyer to obtain financing.

It’s easier to buy a foreclosure with bad credit if you get a mortgage with the same bank that owns the property. Think about it: why would the bank want to end up with the same property as a foreclosure, again? Well, that’s what would happen if they allowed buyers with low credit scores to buy their foreclosures just to earn the interest on the mortgage. In reality, many banks do offer incentives like lower fees or closing cost credits for buyers who use their bank for their mortgage. But the buyers must meet the same credit, income and other qualification standards as anyone else would to seal the deal. 

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