 Personal Finance PowerPoint Presentation. Buying a foreclosed house, top five pitfalls. Get ready to get financially fit by practicing personal finance. Most of this information can be found at Investopedia. Buying a foreclosed house, top five pitfalls. You can find online. Look at the references, resources. Continue your research from there. This is by Amy Fontinier, updated April 23rd, 2022. Buying a house in foreclosure is often touted as a way for both owner occupants and investors to get a great deal on a property. So if you're looking into the property, you might say, hey, look, I'll look at the foreclosed property because there's certain stress involved within that. That might help us to get a deal, but obviously there's more obstacles involved with it as well, so you wanna be well aware of the pros and cons going in. So however, the potential financial rewards are usually not arrived at without a significant amount of hard work. So clearly you're not going down kind of the norm. The normal process of a sale, typically, would be that you have a seller who's gonna be able to put the, who's not pressured in essence to put the item on the market, who has the information necessary as they put the home on the market. So you got the buyer who then has all the necessary information to then come up to a deal. Clearly, if you're talking about a foreclosed type of property, you have some distress involved on the seller type of things, and you've got possibly bank and regulatory items that are going into place there as well, that then is gonna complicate the general scenario to some degree, although it could provide potential advantages to some degrees as well. So you need to know the pros and cons as you go in. Foreclosed properties have some common problems. In addition, there are some standard difficulties that you may encounter in purchasing one. While foreclosures can be great investments as fixer-uppers, either to live in or resell, they often come with challenges. Number one, problems with the property. So if you're in a foreclosed property, so if you can imagine, of course, if you are the person that the bank foreclosed on, now you have someone that was living in the property for some time that might have been under some type of stress that the bank's gonna foreclose on them, they probably might not be completely happy about that situation, which could be ongoing for some time. That could mean that at the least, they're not taking care of the property possibly as much as they would have otherwise. And at the most, there could be damage, almost even purposeful damage to the property, which wouldn't be good for the purchaser, of course. The most important thing is to keep in mind before deciding to shop in the foreclosure market is that these properties are given up by owners who can't afford their mortgage payments anymore. So clearly you're dealing with someone that was going through a tough time generally at that point. And again, they're probably not in the greatest mood about their property possibly not keeping up the property to the point they otherwise would. In this cases, the house may have been poorly maintained after all, if the owner can't make the payments, they are likely falling behind on paying for regular upkeep. Also, some people forced into foreclosure are embittered by their situation and take out their frustration on their homes before the bank repossesses them. So clearly you could see some people in the mindset of saying, okay, the bank's gonna take my home at this point in time. I'm frustrated with the situation possibly causing damage, some kind of damage to the home or seeing what they can do to take it basically extract value from the home before that is done. So this often involves removing appliances and fixtures and sometimes even outright vandalism. So clearly if you're in a selling situation where the seller is not in foreclosure and they're trying to sell their home and get the highest price for it and the buyer is trying to purchase the home, then the seller has an incentive to take care of the home and demonstrate it in its best condition. But obviously as long as the person who's getting foreclosed on is in the home, they don't have that same kind of incentive. It kind of reminds me one time when I had some neighbors that were being forced out, this was a rental type of situation, but they wanted to re-up the lease and they wouldn't let them re-up the lease. So in frustration, they actually dug up the tree in the backyard, which was a huge tree. It went under the fence, it must have taken them forever and it was an orange tree and they basically took the tree as kind of because they were upset about the situation but you can imagine that kind of thing as the type of thing that might happen if you felt like the bank was taking the property. So clearly you got to keep that kind of thing into consideration, which could be quite different circumstance than if you were buying from someone who's selling the home because they enjoyed the home, they want to sell it and they're trying to move somewhere else and life is good for them. So after the occupants leave, the foreclosures sit abandoned, often inviting criminal activity. So if the foreclosed property doesn't have anybody in it because notice that the bank is really not in the business generally to resell property and take care of the property, upkeep the property and resell the property. They're in the business to make interest. They only have the ability to foreclose on the property in the event that there's a default. They don't want the default to actually happen. So there could be a pretty, as long as someone is not taking care of the property or in the property, one of the benefits of having someone living in property is hopefully they value the place that they live in and they're taking care of it. If no one is taking care of the property, then of course it's gonna deteriorate just in terms of nobody taking care of it and it will be subject to possibly people that might want to vandalize it and so on. So number two, maintenance and condition. Maintenance and condition can be a problem in foreclosed properties because of the circumstances under which the previous owner moved out and the amount of time the house may have been unoccupied. Bank owned properties are sometimes disgustingly dirty because of the time spent sending empty intentional neglect by the previous owner or occupancy by vagrants. When a home is locked up with no air circulating for months, built up dirt can cause the entire house to smell. So again, having someone actually live in the home is typically beneficial because of course they're gonna wanna sweep the floor from time to time and open the doors and so what, let some air, turn on the air conditioning or something. So just having it still, even if someone doesn't vandalize it is gonna have it deteriorate a lot faster over time, generally. The previous owner may have made changes to the home without obtaining the proper permits. A typical example is converting the garage into a living space so more people can live in the house. So if there's been some kind of conversion or something like that, then again, if it's not up to the standards, that would be a problem. These changes may be undesirable to the new owners or create headaches for them with local government officials. So obviously if they converted the garage and now you're trying to buy the house and now the garage looks like a living room, but it can't be a living room because under the current circumstances or the state doesn't allow that, then again, problems with that are caused. If the previous owner started to improve the home but fell on hard times, there may be partially finished work. So clearly they could have moved in with good intentions and then not finished things up. The bathroom may be redone while the kitchen has not been updated 40 years or there may be new floors in the living room while the bedrooms still sport outdated carpeting. Additionally, if any repairs were made, they may have been done by the owner themselves or by unlicensed professionals. In other words, people who may not necessarily have done the work correctly. Sometimes foreclosed owners are locked out of a property before they can move their belongings and in some cases they do not take everything with them. So many real estate owned or EO properties contain furniture, trash, clothes, and other items that you will be responsible for or disposing of when you become the property owner. Number three, vandalism and neglect. Damage is not uncommon in foreclosed properties and when houses are not lived in, it is easy for them to fall into despair from neglect. So clearly, again, having someone in the home means that it's less likely that someone's gonna vandalize the home. If everybody knows that the home has no one in it for the last year or so, then it's likely that people that wanna vandalize stuff will go and vandalize stuff. So in extreme cases, it may be caused by vandals or even former owner. When a property sits vacant for too long, new owners may have to continue with graffiti, broken windows, and other damage that could be caused. Broken windows can be common in REOs for several reasons. As mentioned previously, vandalism could be a cause. Also, when banks lock out owners while taking possession of the property, the former owner may break a window or door to retrieve belongings. Previous owners may also purposely inflict damage at the bank's expense by putting holes in walls or treating off baseboards and crone and crone molding in a rare or extreme cases. So notice that if you're gonna, again, you can kind of see the mindset of someone that feels like they got moved out of the home of the bank, took their home and so on. So obviously they might try to benefit from the situation by first taking things of value from the home that might be normally kind of part of the structure of the home, like trying to uproot a tree or something like that and take the tree or the appliances or whatnot. And then in more extreme cases, they might just beat up the home, obviously, and that would be a problem. So the previous homeowners might remove items of value from a foreclosed home, including appliances, fixtures, doors, copper pipes, and more, in worst case scenarios, anything that the homeowner does not take might be taken by thieves. Either way, bank-owned properties may be missing things that generally come with seller-owned properties. Number four, problems with the purchase. Foreclosures can still be a good deal despite all these potential problems. If you are willing to fix issues that most people don't want to deal with, you can purchase a home at a significant discount. So if you're saying, hey, look, I'm a fixer-upper, I'm happy to take a house that's been maltreated and I'll fix it, right? If that's what you do, you might say, that's the way to go. You still gotta deal with the complexities of just getting the deal done in that case then. However, you may encounter additional problems when buying the property and improving it to move in conditions. Lenders will not give homeowners money for a dwelling that they consider uninhabitable or appraised below the purchase price. So if you are an investor paying cash, this will not be a problem. The HUD section 203K program can also help in some circumstances. Common Sense says that banks should want to unload our EOs as quickly as possible, but in reality, banks sometimes drag their heels in considering offers and throughout the escrow process. So number five, no seller disclosure and competition. Since no one from the bank has ever lived in the house, they're unlikely to have any knowledge of the existing problems with the property. So again, no one has any intimate knowledge because no one's in it. So you will have to uncover everything yourself during the home inspection by asking neighbors or through experience after you become the homeowner. Because the foreclosures can be great deals, they are attractive to investors looking to flip properties or use them as rentals. So clearly a flipper situation that likes to fix up the properties are that would be this kind of thing they might be looking for. Since investors can make all cash offers with fewer or no contingencies and fast closings, their offers may be more attractive to the bank than those from would be owner occupants. So clearly if you could give cash transaction that's always useful to the person selling in this case, the bank. How can I buy a foreclosed home? You can buy a home in foreclosure through a real estate agent in a short sale or in an auction held by a lender. Should I buy a foreclosed home? Buying a foreclosed home may be cheaper than buying one at market price, but it can be a challenge and you may have to research options for financing if you can't pay all cash. A foreclosed home is a property that its owner couldn't afford to keep. So the house and property around it may be an ill repair. However, a foreclosure can help some individuals buy a large fixer upper that will regain its market value after some interior and or exterior work. What does a foreclosure mean? A house in foreclosure means the owner couldn't afford to make mortgage payments and the home has been seized by the lender. Typically we could think of the bank, the financial institution usually. Can I use a mortgage to buy a foreclosed home? If you want to buy a foreclosed home, you should be able to purchase one using the government backed or conventional mortgage, but the property will need to pass a home inspection and an appraisal. The bottom line, there is money to be made in foreclosures, but you should know the challenge. You are undertaking ahead of time and choose your property carefully. Don't overlook the fundamentals that make a property desirable because the purchase price is a bargain. You should also extensively research financing options for foreclosed homes. While you can go to the traditional route of using a private lender as you would for a conventional home, lenders can sometimes be reluctant to finance a foreclosed home as it is worth looking into loans from the federal housing administration, FHA or Freddie Mac.