Top 10 Myths About Buying a Foreclosure
Trulia.com and RealtyTrac recently surveyed US adults to get some insight into what people *think* is involved with buying
a foreclosure. Here are the Top 10 Myths that came up, and the facts to set the
record straight:
1. Foreclosures need a huge amount of work. 92 percent of consumers expressed that if
they bought a foreclosure, they would be willing to make home improvements
after they closed the deal, with 65 percent being willing to invest 20 percent or
less of the purchase price. Although
stories of foreclosures missing plumbing and every electrical fixture are very
memorable, many foreclosed homes need only the (relatively inexpensive)
cosmetics that many new homeowners want to customize no matter what kind of
home they’re buying: paint, carpet, etc.
2. Foreclosures sell at massive discounts,
compared to other homes. Almost
every member – 95 percent – of the surveyed group expected to pay less for a
foreclosed home than for a similar, non-foreclosed home; 18 percent had
realistic expectations of less than a 25 percent discount. However, 36 percent expected to receive a
bargain basement discount of 50 percent or more off the value of a similar
non-foreclosure. Reality check: while
foreclosures might be discounted massively from what the former owner paid or
owed, their discounts are much more modest when compared to their value on
today’s market and the prices of similar homes.
3. Buying a foreclosure is risky. 49% of respondents said they perceived
buying a foreclosure as risky. And yes -
buying a foreclosure at the auction on the county courthouse steps can have
risks, including the risk the new owner will take on the former’s owner’s liens
and other loans. But most buyers looking
for foreclosures are looking at bank-owned properties, which are listed on the
open market with other, ‘regular’ homes.
Buying these homes is really no more risky than buying a non-foreclosed
home.
4. You can’t get inspections on the property
when you buy a foreclosed home. County auction foreclosures don’t often offer
the ability for buyers to have the homes inspected. But virtually all bank-owned properties for
sale on the open market not only allow, but encourage buyers to obtain every
inspection they deem necessary. This is because almost every bank sells their
foreclosed homes as-is, and they want to avoid later liability. It’s in everyone’s best interests to make
sure that the buyer has full information about the property’s condition before
they close the deal.
5. There are hidden costs to watch out for
when buying a foreclosed home. Sixty-eight
percent of survey respondents who felt there is a negative stigma to buying a
foreclosure expressed the concern that
buying a foreclosure poses the danger of hidden costs. At some foreclosure
auctions, there are buyer’s premiums and other hefty fees that can really add
up and take a chunk out of the effective savings the buyer stood to realize.
However, when you buy a bank-owned property that is listed for sale with a real
estate agent, the closing costs are the same as they would be if you bought a
non-foreclosed home. Overdue property taxes, HOA dues and other bills left
behind by the defaulting homeowner are cleared by the bank that owns a
foreclosed home before it is sold on the market, though these items should be
watched out for if you buy a home at the county foreclosure auction.
6. Foreclosures are more likely to lose their
value than “regular” homes. Thirty-five percent of U.S. adults who believed
there are downsides to buying foreclosed properties believed this myth. In
fact, because foreclosures often offer a discount from the home’s current
market value, they may offer some degree of insulation from further
depreciation. Whether a home loses its
value or not has to do with the dynamics of the local market, including the
area’s supply of homes, demand for homes, interest rates and the health of the
employment market – not with whether the home was or was not a foreclosure at
the time it was purchased.
7. Most foreclosures happen when homeowners
just walk away. Out of homeowners
with a mortgage, only 1 percent said walking away from their home would be their
first choice if they were unable to pay their mortgage. And a whopping 59 percent of mortgage-holders
said they wouldn’t walk away from their home – no matter how upside down they
were on their mortgage. Most foreclosures happen when the owners lose their
jobs or their mortgage adjusts to the point where they absolutely cannot pay
the mortgage, no matter how hard they try.
Voluntary ‘walk-away’s are simply not as popular as many people think.
8. When you buy a foreclosure, you should
lowball the bank – they are desperate to get these homes off their books. Stories about in the press abound about
the large numbers of foreclosed homes the banks have on their books. We’ve all heard the adage that banks have no
interest in owning these properties. But
the real deal is that they’re simply not desperate enough to give these places away. Also, the banks mostly service the defaulted
loans – they don’t own them. Various
groups of investors do, and they hold the banks accountable to selling the
bank-owned property at as high a price as possible, helping them cut their
losses. Many banks won’t even consider
lowball offers, and many bank-owned properties actually sell for above the
asking price. Before a bank will take a
lowball offer, they will almost always reduce the list price first, and see if
that attracts a higher offer than the lowball one they have in hand.
9. You need to be able to pay in cash in order
to buy a foreclosure. Again, if you
buy a foreclosed home on the county courthouse steps, you might need to bring a
cashier’s check and be ready to pay for the place on the spot. By contrast, bank-owned homes are bought
through a more normal real estate transaction, which means buyers can obtain a
mortgage to finance the home just like they would if the home weren’t a
foreclosure. It is true, though, that in some markets, banks prefer offers from
cash buyers, but this tends to be in situations where the property’s condition
is pretty dire, and the bank knows this may make it hard for a buyer to obtain
financing.
10. It’s easier to buy a foreclosure with bad
credit if you get a mortgage with the same bank that owns the property. Think about it: why would the bank want to end
up with the same property as a foreclosure, again? Well, that’s what would
happen if they allowed buyers with low credit scores to buy their foreclosures
just to earn the interest on the mortgage. In reality, many banks do offer
incentives like lower fees or closing cost credits for buyers who use their
bank for their mortgage. But the buyers must meet the same credit, income and
other qualification standards as anyone else would to seal the deal.
