Why NOT to Buy a Foreclosure

In today’s topsy-turvey real estate market, it seems that there are always a handful of agents and realtors that “insist” that buying foreclosure are a great bargain and everyone should have at least 4-5 of them.

Well, to tell you the truth, some of what they are saying is truth but much is a fabrication of implied truth intending only to fatten their bottom line. Many real estate agents intentionally lie to get their clients to buy foreclosures so they can generate a commission. The problem is that you don’t need a real estate agent to buy a foreclosure! But that is not what I am going to discuss here today, instead, I am going to talk about why “not” to buy one.

First of all, a brief explanation of what a foreclosure is:

Normally, a house is purchased through a real estate agent and a normal escrow handles the middleman issues and is the “neutral 3rd party”. There is the buyers agent and the sellers agent and the escrow officer handling the escrow. Once all the issues are resolved (title, loans, repairs, termite, etc) then the escrow closes and the buyer takes possession of the home or condo.

The new buyer has taken out a loan for the property and pays monthly for that loan and if it is a 30 yr fixed, the payments are consistent every month. If it is adjustable then the payments change with the interest rate based on LIBOR or on the 10Yr note or equivalent.

Suppose a buyer cant make a payment by the due date, then a late notice is sent out and the buyer has like 10 days to bring the loan current. If they don’t then a “notice of default” is sent and filed at the county recorders office. If the buyer still doesn’t pay then the lender forecloses on the property. They file a document with the county notifying the public of a pending sale and notify the seller they will lose their house. Once it goes to sale on the county courthouse steps, someone usually buys it for the back taxes or loan amount. It is too complicated to explain here about the different ways people can lose their homes, but for the sake of argument, we’ll say that foreclosure is the only way. Now, if no one buys the home at the auction, it goes back to the lender and they have what is called REO or Real Estate Owned. They don’t want the property, they want the money plus interest from the loan!

Now, what does the buyer do? The are forced to leave the house against their will. DO you think they are happy about that? NO, they aren’t. And guess what they are thinking? They are mad at the lender and do not even realize that they were the reason they lost their home. So in order to get back at the lender they might be thinking: “if I don’t get this home, then nobody does” and proceed to destroy the home. I have seen picture of vacant foreclosures that are completely wrecked. Mold on the walls up 3-4 feet, dog urine and feces all over. Broken walls and cabinets, missing fixtures, and the like. Still want to buy a foreclosure?? It gets worse! By law, they cannot even give a home warranty on the home, there is no termite inspection and the transaction is minimally monitored except the auction it off at the county courthouse. Nice looking little foreclosure might look nice on the outside, but inside is a whole other matter.

My advice? Buy a home through a Real Estate agent and go through a standard escrow. You will be glad you did!

By James Noll – Realtor, USA Realty & Loans