The bottom line: when a property is in trouble or in distress, itâ€™s critical to be far more cautious than when purchasing a traditional sale property.
In addition to the challenges related to determining what a distressed property is really worth, there are many unknowns and six major roadblocks:
More complicatedâ€”Buying distressed properties is not as easy as one-two-three. And is certainly not for the inexperienced homebuyer, without the guidance of an agent with expertise in these types of properties. Foreclosures can entail complicated transactions, during which you have to stay on top of not only your legal obligations but also those of the homeownerâ€”who may have more rights than you realize. And in certain states, even homeowners in dire straits have the legal ability to reclaim the property if they are able to prepay their debts.
Cash onlyâ€”What makes foreclosures in particular such a challenge for first-time buyers is that such sales are often for cash onlyâ€”a difficult or almost impossible hurdle for beginners. An additional challenge is competition with investors who typically have plenty of cash at hand. All too often the lender will accept a cash offer over a financed offer even if the financed offer is for a higher amount.
Not always the lowest priceâ€”Distressed properties also may not necessarily carry rock-bottom prices, even if they are selling way below what the previous owners bought them for.
Not always a clear titleâ€”Although itâ€™s very rare, it is possible that you wonâ€™t get title insurance or other guarantees as to the state and condition of the house, and all the liens and loans that are held against it. You may think you would be buying the house free and clear. But imagine closing on a property only to find out, after the fact, that there is also an existing second or third mortgage or lien against it that needs to be paid off! You would then be responsible to pay it off. A foreclosure property that is purchased without a clear title can be a clear nightmare.Â Historically, most closings are completed with a title insurance policy in place and rarely are there situations where the buyer of the home has had an issue. But to be on the safe side, make sure you get a clear title report; if you canâ€™t, then walk away.
Last-minute offersâ€”There is a chance that even if your offer is verbally accepted, someone can come in with a higher bid at any time until you have a fully completed contract in hand; and this may end up being several weeks after you thought you bought the home.
â€œAs isâ€â€”Most distressed property deals are â€œas is.â€ Which means it can wind up costing you way more than you bargained for if the house has hidden problems, and if it requires a considerable amount of money and work to bring it back to life. Inquire about disclosures and inspections. You are on your own if you canâ€™t get the lender whoâ€™s selling the property to fess up to any problems with the house or to make any repairs, and more often than not the lender has limited knowledge of the property. Why? Because, chances are, the lender has never even stepped foot on the premises.
Never Go It Aloneâ€”Work with the Pros
Listen, if you come across a great foreclosure deal or a wonderful steal of a short sale, I am fine with that. Â And while the overall process of home buying is the same, as I have said above, there are many other hoops to jump through than those youâ€™ll encounter with a nondistressed home. The laws change monthly and the requirements and processes for sales shift as quickly as the moon shifts position.
You need that extra expertise to help guide you through this complicated process and achieve three important goals:
Determine what the house is really worth.
Know exactly what youâ€™re buying for the price.
Abide by the laws in your state and local area so you donâ€™t miss out on something critical that makes your entire deal unexpectedly go bust at a later date.
The Distressed Property Neighborhood
Last, hereâ€™s something else to keep in mind when buying a distressed property: how has this houseâ€”and potentially others in the neighborhoodâ€”affected the overall feeling and value of the area? Distressed properties are often found clustered in less than desirable neighborhoods or areas of a city. In that case, the neighborhood itself may be in disrepair as more and more owners abandon their houses. Will you be stuck in a declining neighborhood that can take years to recover? Itâ€™s important to know what is happening with foreclosures and delinquencies in the surrounding area. I often say, you are not just buying a homeâ€”you are buying a neighborhood.