Everyone I meet has heard all about foreclosures and they all want to know how to get in on these great deals in Bucks County. I find that most people don't understand all of the risks involved.
Becoming The Landlord To The Previous Owners: When you buy a foreclosure it is at the sherrif's sale so it is actually at the very moment the bank is reposessing the home. What this means is the homeowners could very likely still live there. So, the winning bidder may have the previous owner's as tenants in their new property & it is now up to them to evict them. Since tenants have rights it can take some time and legal costs to accomplish this.
The Condition Of The Property Is A Mystery: Most people who have purchased a home before are used to getting to tour the home to see if it appeals to them. They also usually have a home inspection before they purchase the property to ensure the systems are working properly & so they know what the true cost to purchase the home will be if it needs repairs. When it comes to forecloures the home is not up for sale so there aren't any tours, no seller's disclosure & no home inspections. You can do a drive by & if you have the nerve maybe even try and talk to the owners before the sherrif sale, but most folks I know feel uncomfortable even thinking about this. So, you are purchasing a home without seeing the interior and have no clue about the condition. Another issue is often times the previous owners are understandably angry about their situation & won't be looking to help you "steal" their home. It isn't unusual for the previous owners to remove all of the appliances, light fixtures, or even HVAC units before they get foreclosed on. You could also find doors ripped off hinges and holes in the wall. The damage to the property doesn't usually stop with what the owners did out of anger, but also out of necessity. If you don't have enough money to pay your mortgage & you know you're going to lose your home you start neglecting issues that need to be repaired. The leaky roof or toilet for example. This can cause some major defects.
Need All Cash To Purchase & Often Times There Are Hidden Costs: You can't get a mortgage to purchase a foreclosure at the sherrif's sale. A mortgage co. requires an appraisal & in Bucks County you only have 30 days to settle after you make your winning bid. You have no way to get a bank appraiser through the property so you'll need all cash to make the purchase. Even if you could get an appraiser through often times the condition would not be acceptable to a lender. Most lenders won't even give you a loan if the stove is missing let alone the HVAC system.
Also there could be hidden costs such as liens from other lenders, homeowner associations, or maybe even credit cards. The only way to ensure you don't get stuck with an extra bill that can easily be in the tens of thousands is to pay for a title report. These typically cost a couple of hundred dollars so this can become quite costly as well. Let's say there are 10 homes you are interested out of a list of 200. Even if you negotiated a deal to run them all at $75 your still out $750, but here's the kicker.
Not Many Homes Actually Sell At The Sherrif Sale: Not too long ago I was at the Bucks County Sherrif Sale and out of the 200 homes that were on the list only 2 sold to investors. The majority of homes up for auction get stayed, postponed, or the bank out bids the investors & will later list the home with a Realtor. So, you could easily keep spending money on homes that won't sell which will have a negative impact on your ROI.
This type of investing is not for the faint of heart, and there's always a gamble so you'll need some deep cash reserves as well. The good news is there are still plenty of options out there for investors that are much more safe & reliable. These are Short Sales & REO's.
A Short Sale is where the seller is negotiating with the bank to accept less than the bank is owed. To give an example the seller purchased the home with a $200,000 loan a few years ago, and now due to their circumstances they can no longer afford to make the payments. Over those few years the condo has dropped in value to $190,000. To sell the home will cost approximately 7% so the net would be $176,700. So, the seller is trying to negotiate with the bank to accept less than they are owed rather than pursuing foreclosure. The reason the banks are willing to accept these deals is because it saves them time and money having to repossess the home and then hire an agent to sell it all while no one is looking after the home and keeping it in good repair. There are some great deals out there like this, but they require more patience and flexibility than a straightforward transaction so they are not for everybody. Banks typically take 30 - 45 days to respond to your offer, and often times the home is being sold as-is so even though you are getting a good deal you may need more money in your reserves to fix things you usually would have asked the seller to do. One concern with a short sale is you have an agreement with a seller, but they cannot actually owner their agreement so you are relying on their agreement with their bank. You are not allowed any contact with the bank and if at anytime the bank decides not to agree to the short sale your deal falls through. So, it takes patience & understanding that sometimes it won't work out & you'll have wasted some time pursuing a home.
A Bank Owned, or REO property is sold through our MLS and is a home that has already been foreclosed on and the owners have been evicted. Out of these three types of sales (Foreclosure, Short Sale & REO) this is probably the safest. The reasons why are because it is available for showings so you can see what the condition is like, and because the bank owns the home and has it listed you know they want to sell. They will usually sign off within a week of submitting your offer so you are not waiting for a month, or more like you would with a short sale. You get to do your inspections to make sure there aren't any overwhelming defects, and if they are you can ask for credits, repairs, or even walk if you negotited your agreement right.
So, just keep in mind foreclosures sound great, but they could very easily become the biggest mistake you've ever made. If you are interested in finding a good deal in Bucks County to start your investing career give me a call #215-860-4067 or send me an e-mail firstname.lastname@example.org
I am an investor myself & have helped quite a few other investors over the years in Bucks County & Philadelphia. From the complete gut & renovation to the place that just needs some cosmetic upgrades I've done it all. I love Real Estate as a tool to plan for retirement by generating passive income and think today is a great time to start investing as prices have hit bottom, but are expected to start climbing, interest rates are at historic lows & rents are on the rise.