Buying foreclosures: Buyer Beware!

The current feeding frenzy over foreclosed properties — fueled by media hype that buyers are getting outrageously good deals — has caused many uninformed buyers to leap headlong into the foreclosure arena without a clue as to the reality of the foreclosure buying process.

Before you start shopping foreclosures, know what you are getting into.

Buyer Beware

The foreclosure environment is a “Buyer Beware” proposition at best. In a normal home purchase, buyers typically make their offer subject to performing inspections on the property – plumbing, heating and air conditioning, electrical, termite, radon, etc.

But foreclosure properties are quite different. While they may accept your offer “subject to inspections,” that in no way implies that they will be willing to make any concessions should you discover the home has a bad furnace or leaking roof. They are simply giving you the opportunity to discover the condition of what you are buying … nothing more.

Buy a Blind Pig

In fact, many foreclosed and “short sale” homes have the utilities turned off which prevents buyers from inspecting them at all. They cannot even determine whether they have working plumbing, a bad furnace or a safe electrical system.

Many of the “third-party” companies managing foreclosure properties for their clients – the banks and Freddie Mac and Fannie Mae – will not turn the utilities on so buyers can perform reasonable inspections. How many investors – no matter how experienced or knowledgeable – would buy a blind pig unless the price was so dirt-cheap even the cost of a new furnace is not a deal-breaker.

Inspections Can Cost Double … or More!

Some third-party property management companies will permit the buyer to put the utilities in their name so the buyer can do inspections. However, the buyer must pay the cost of de-winterizing the property (about $100), then RE-winterizing the property after the inspections are done, the cost of re-installing the water meter (and uninstalling it after the inspections are performed), the cost of initiating electric and gas service, turning on the pilot lights to furnace and hot water heater, and paying for the utility use long enough to make sure the home has warmed up so a thorough inspection can be performed.

To make matters worse, many municipalities require that any liens from unpaid water bills be paid before they will turn the water back on. Since most former homeowners of distressed properties weren’t exactly flush with cash, most foreclosures and short sale homes have outstanding water bill liens in the amount of several hundred dollars.

So, if a buyer wants to have the property inspected, they must pay the water bill lien, pay to de-winterize and re-winterized, pay for the re-installation of gas and electric PLUS the cost of the gas and electric usage, paying to have the water heater and furnace turned on (unless you can do it yourself). Finally, the buyer gets to pay for the actual inspections which typically range from $350 to $500.

Because of the policies and practices of many third-party property managers, it is not uncommon for inspections to cost more than $1,000 on foreclosures and short sales.

Kinda’ Like a Dog Chasing its Tail

Eighty to ninety percent of first-time home buyers finance their purchase with FHA-underwritten financing.

But here’s the rub: FHA sends out an appraiser (to protect FHA’s interests, not yours), and the appraiser discovers there is no heat or lights. The appraiser cannot check to make sure the furnace works, etc. and therefore requires, as a condition of financing, that a full range of inspections be performed and the inspection report provided to the FHA appraiser. Even private mortgage insurance appraisers are requiring full inspections prior to underwriting a loan.

But Freddie and Fannie won’t turn the lights on so it is up to the buyer to shell out upwards of $1,000 to get the utilities on and do the inspections.

Kinda’ like a dog chasin’ its tail, ain’t it?

“I’m going to take my ball and go home.”

Banks, third-party property managers, Freddie Mac and Fannie Mae all operate with this mentality when it comes to foreclosures and short sales: “If you don’t play the game my way, I’m going to take my ball and go home.”

Get this straight: If you want to play in the foreclosure game, you MUST be prepared to play by the banks rules. They don’t care when you want an answer on your offer (even if it’s a great offer!) They might give you an answer whenever they feel like it – could be days, week, or several months … maybe never! They don’t care when you want to close; they will close when they are ready to close. They don’t care about your contingencies in your offer; they will demand you sign their addendum superseding anything in your offer they don’t like.

Don’t want to play that game? Then you’d better plan to buy a different house.

Now, if you are really, truly committed to buying a foreclosure, you may get so far as to actually close a sale. The home is yours. Yippee!!

How much ready cash do you have?

Most home buyers – especially first-time home buyers – aren’t standing in a pile of money to fix up distressed properties. Most of these homes had been neglected for years because the previous homeowner could not afford even normal, routine maintenance let alone costly repairs. Some have been destroyed intentionally because the homeowners were angry over losing their home.

How much money do you have in ready cash to renovate a foreclosure property? Foreclosures in move-in condition are extremely rare. Most require a minimum of a few thousand for carpet, paint, and general cleaning. Many require much more.

With plenty of cash, sense of style, a little handyman knowledge and a lot of elbow grease, buying foreclosures can be a great investment. Or they can be your worst nightmare. Sometimes, they’re both.

It simply best to know what you’re getting into before you start down that road.