Why NOT Buy a Foreclosure
In today’s topsy-turvy real estate market, it seems there are always a handful of real estate agents and brokers who “insist” that buying a foreclosure is a great deal and everyone should own at least 4-5 of them.
Well, to tell you the truth, some of what they say is true, but much of it is an implicit fabrication of truth with the sole intention of fattening their bottom line. Many real estate agents intentionally lie to get their clients to buy foreclosures and earn a commission. The problem is, you don’t need a real estate agent to buy a foreclosure! But that’s not what I’m going to discuss here today, instead I’m going to talk about why “not” to buy one.
First, a brief explanation of what a foreclosure is:
Normally, a house is bought through a real estate agent and a normal escrow handles the problems of the intermediary and is the “neutral third party”. There is the buyers agent and the sellers agent and the escrow officer who handles the escrow. Once all issues are resolved (title, loans, repairs, termites, etc.), the escrow closes and the buyer takes possession of the home or condo.
The new buyer has taken out a loan on the property and pays monthly on that loan and if it is fixed for 30 years, the payments are consistent every month. If adjustable, payments change with the interest rate based on LIBOR or the 10-year note or equivalent.
Let’s say a buyer can’t make a payment by the due date, then a late notice is sent, and the buyer has about 10 days to bring the loan current. If they don’t, a “notice of default” is sent and filed with the county recorder’s office. If the buyer still doesn’t pay, the lender forecloses on the property. They file a document with the county notifying the public of a pending sale and notifying the seller that they will lose their home. Once it goes up for sale on the steps of the county courthouse, someone usually buys it for the back taxes or the loan amount. It’s too complicated to explain here the different ways that people can lose their homes, but for argument’s sake, we’ll say that foreclosure is the only way. Now, if nobody buys the house at 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 on the loan!
Now what does the buyer do? They are forced to leave the house against their will. Do you think they are happy with that? NO, they are not. And guess what they’re thinking? They are mad at the lender and don’t even realize that they were the reason they lost their home. So, to get back at the lender, they might be thinking, “if I don’t get this house, then no one will” and proceed to destroy the house. I have seen pictures of vacant foreclosures that are completely trashed. Mold on the walls up to 3-4 feet, dog urine and feces everywhere. Broken walls and cabinets, missing fixtures and the like. Still want to buy a foreclosure? It gets worse! By law, they can’t even give a home warranty on the house, there is no termite inspection, and the transaction is minimally monitored, except for the county courthouse auction. A small foreclosure that looks good may look good on the outside, but the inside is something else.
My advice? Buy a house through a real estate agent and go through a standard escrow. You will be glad you did!
By James Noll – US Real Estate Agent, Realty & Loans