The Truth about Foreclosures

Posted by Coral Dworaczyk on Tuesday, May 15th, 2018 at 10:04am.

At least once a week, we get calls from Investors or "investors" asking about good deals on foreclosures.  Well, here's the truth.  THERE ARE NO GOOD DEALS ON FORECLOSURES.  OK, ok.  That may be a stretch, but it is more true than false.  Here are some really important things to keep in mind about researching, buying, and closing deals on foreclosures.

First, the bank is NOT selling it for ONLY what is owed on the loan. That may have been the case in bygone years, but it certainly isn't the case now.  Local agents have relationships with different Lenders (the entity foreclosing) and they submit valuations of the properties before they are listed on the active market.  The homes are valued similar to how any home for sale would be valued, with comparable properties, but there are often reductions or discounts due to the home's condition.  Therefore, the home may be listed for below market-value, but there is reason.  If a home is listed for $50,000 below market, do your research and make sure it doesn't need $100,000 in repairs before you get in over your head (biggest mistake made by inexperienced investors).  Build a solid relationship with a contractor and plan to bring him/her along with you to showings at properties that you are serious in pursuing. 

Next, there is often very-little negotiating power on foreclosures.  I have had good luck getting SLIGHT price reductions, but that's it.  Again, these Sellers are not new to real estate, and they typically know what they are dealing with since they have employed the use of local professionals.  If a property isn't selling, they will often start aggressively reducing the list price until someone bites.  If a property has been on the market a while, you may have some luck negotiating.  Don't be afraid to send in a lower offer, but don't expect great reduction on the Seller's side immediately. 

Know your top dollar and an estimated expenses for repairs before you start the bidding process.  The few properties that are better deals go FAST.  There is NO TIME to "sleep on it".  Even if you are the first offer in, and you receive a counter offer from the foreclosure-Seller, the Seller often places a short time limit for you to respond.  Get your ducks in a row early and be ready to move quick.

When preparing an offer, keep in mind that these Sellers often have their own contract forms and Addenda prepared by their own legal team.  In my experience, foreclosure Sellers are still very honest and upfront, but make sure you read and understand their terms.  For example, most of them do not offer what we call and "option period".   They will often offer something similar, and maybe call it an "inspection period" and still give you a set 7-10 days period to inspect the property and renegotiate or back out if you find unexpected surprises.  However, I have also seen contracts where the inspection period ONLY applies to Buyers that plan to use the home as their primary residence (i.e. if the Buyer is an investor planning to flip or resale the property, they did NOT get any time to inspect the property and possibly back out without penalty).  As with all contracts, READ THEIR DOCUMENTS CAREFULLY.  If you do not understand their contract, seek legal advice from your Attorney.

If you are interested in purchasing investment properties, consider non-foreclosures also.  Often, a Seller's motivation is based on a family change, death, or financial struggle.  Although none of us want to actively prey on others' misfortunes, private Sellers may actually offer better deals that foreclosure companies, and you may even offer that Seller a great deal of relief.

-Coral

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