Is Buying a Foreclosure a Good Idea?

Is buying a foreclosure a good idea? Maybe. Are you looking to buy a home to live in or are you an investor? If you're goal is to occupy the property as your primary residence, buying a foreclosure may be right for you. You can get more bang for your buck by purchasing a home that needs a little TLC. But if you are a real estate investor, buying a foreclosure may not be a good idea at all.

Here are four important steps to follow when buying a foreclosure to live in as your home:

1. Hire a Real Estate Agent: Since the seller, which is a bank, is going to pay you're real estate agent's commission anyway, you might as well get someone on your side to help you with the transaction. And if you don't hire an agent, the bank/seller is not going to pass those saving onto you. Instead, the bank/seller will keep the extra money earmarked for a buyer's agent. Therefore, it's free to you to hire a real estate agent, so go get one (preferably a good one).
2. Don't Expect to Steal the Property: Banks are more greedy than you think. Contrary to popular belief, banks aren't "desperate to get foreclosures off their books." The opposite is usually the case, whereby the seller/bank won't budge on price nearly as easily as a regular seller will. Certainly you can try to offer far less than list price, but don't be surprised if the seller/bank rejects your offer.
3. Order a Home Inspection: It may cost you $300 out of pocket, but it is worth it.
4. Don't Set Your Heart on the Deal: Why? Whatever hidden issues appear on the inspection report, in almost all cases, the seller, which is a bank, won't reduce the price or provide any concessions for the surprise problems the inspector finds. Instead, the bank/seller will typically tell you that the deal is "as-is" and that if you want that property, you have to accept all the warts that come with the property. By not setting your heart on the deal, it'll be a whole lot easier to walk away rather than settle for buying a foreclosure you fell in love with that has significant issues.

Plus, there are other benefits to buying a foreclosure if you're intent is to live in the property. HUD homes, which are government owned foreclosures, will only accept offers from "owner occupants" for the first 30 days so you have no investors to compete with. In some communities, HUD homes come with special incentives too, such as down payment assistance to local service workers, like policemen, firemen and teachers. Also, VA foreclosures provide special VA Vendee financing options (to everyone, not just military men and women) which have terrific terms and may be easier to qualify for than a normal mortgage.

But what if you are an investor, is buying a foreclosure a good idea? In most cases, no. Here are the three main reasons why smart real estate investors avoid buying foreclosures:

1. Competition: Most foreclosures are listed on the MLS and therefore, everyone else knows about the deal, including retail buyers who are usually willing to pay for more than an investor for a property. Smart investors buy deals that have no competition. Foreclosures are highly competitive. (NOTE: There are some rare instances where select types of foreclosures are not subject to competition, which are the types of foreclosures I recommend to my students. You can learn more about this by reading the article, "Where the Money is in Foreclosures.")
2. Rigid: Buying a foreclosure is very rigid. You must provide earnest money with the offer. The bank/seller requires you to use their contract. You must be pre-qualified. You must have a down payment. And on and on. There's no flexibility. You're unable to employ creative strategies that eliminate the need for earnest money, a down payment and qualifying for a loan. What if you don't have any money? What if you can't get a loan right now? Exactly. Buying a foreclosure doesn't allow for any out-of-the-box no money down techniques.
3. Stingy: Banks as property sellers can be a nightmare to deal with. As already discussed, if an inspection turns up a major issue, the bank rarely provides any concessions and simply tells you as the buyer to hit the road. But they are also downright bullies in other cases. For example, I had a situation whereby the contract I had with the seller/bank clearly stated that the seller had to provide clear title prior to closing. Right before closing, a title problem came up and the cost was going to be $10,000 to fix. The bank wouldn't reduce their price by $10,000 nor would they fix the title problem that they agreed in writing to fix. When I threatened legal action, their response was something along the lines of, "we have far more money to fight a legal battle than you so good luck." In the end, the listing agent, representing the bank, took the commission reduction to ensure the deal closed.

Other issues frustrating foreclosure investors in today's market is that many banks have purposely slowed down the number of foreclosures they are releasing onto the market. They are artificially reducing supply in the marketplace. Meanwhile, there is much talk about the benefits to investors of buying single family homes, so demand for foreclosures is on the rise. This is creating bidding wars in markets all across the country and buyers are paying above list price to get offers accepted. It's insane! As one of my favorite business people in history, Sam Walton, said, "swim upstream." If supply is limited and demand is up, go upstream, move in the exact opposite direction as everyone else.
Is buying a foreclosure a good idea? As you can see, it depends.