Home Buying in Tucson>Question Details

Ange, Home Seller in New Orleans, LA

Is it wise to buy a foreclosure?

Asked by Ange, New Orleans, LA Fri Jan 30, 2009

We are seeking a home in Tucson and I can see that, unfortunately, the great prices are the result of foreclosures. My worry is that if we buy a house in a development where there are many foreclosures, the community won't be viable. Still, how can I pass on these prices? Is it safe/wise to buy a foreclosure?

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First, I would not necessarily shy away from subdivisions with many foreclosures. Many homes in these neighborhoods are selling at prices well below what it costs to build them. The high number of foreclosures are due to bad lending practices that resulted in many first time home buyers losing their homes, not to "bad" neighborhoods. You must evaluate the entire neighborhood, of course - are the neighbors keeping it up?

In Julian Ranch, for example, there were 28 homes on the market in November, but six homes were also sold that month. That is a healthy market and once the foreclosures are gone, prices will come back.

Turning to the more general question, "is it wise to buy a foreclosure?", here is my opinion:

I cannot say it is wise to buy just ANY foreclosure, but you can generally find the best values in foreclosed homes. To be successful purchasing a foreclosed home, you must be able to determine the true cost and market value of the home.
Foreclosure properties are not for most home buyers. They are often dirty, dark (the electricity is off) and in poor condition – the owners have not been able to afford to properly maintain the home. The kitchen appliances, fans and ceiling fixtures have often been removed by the owners. Sometimes personal belongs and trash still litter the floors or the walls and doors have holes in them. They may smell.
Most Buyers cannot see past these defects. They either want to buy a home that is “move-in ready” or with only minor repairs. The condition and fear of buying a defective home scares many people off.
If you are still interested in a foreclosure, you must have the home inspected by one or more professionals. If repairs are needed, you should also have a registered contractor provide an estimate. Once you know what it will cost to repair the home, you can determine the current market value by subtracting the cost of the repairs from the average price of homes sold in the neighborhood.
For example, let’s say that comparable homes in the neighborhood have sold for $240,000. The estimated cost of repairs is $20,000, making the current market value of the home in this condition $220,000 ($240,000 less $220,000).
The home is listed for $210,000, which is almost 5% below the current market value of the home. If you can negotiate a price of $198,000, you have purchased the home for 10% below current market value.
One important point – you must also consider future market value. For example, you may be able to purchase a home on a busy street at a very low price, but it will likely be more difficult to sell when you put it back on the market.
Be cautious about buying any home with an inherent defect that will make it difficult to re-sell. A small, enclosed kitchen, a single car garage when two car garages are the standard or a two bedroom home in a subdivision where most homes have three bedrooms or more, are also examples of “inherent defects”.
You may also have to pay for utilities or repairs even before you purchase the home. The utilities are often turned off and service must be restored in order to inspect the home. The lender often not pay to restore service and the burden and cost are on the Buyer.
Appraisers sometimes require certain repairs be made before the loan will receive final approval. I represented a Buyer in a recent foreclosure who was required to replace two interior doors, a thermostat, tile in five rooms and cap the ceiling outlets where the ceiling fans had been. The estimated cost was $1,000, and although the Buyer signed an Addendum that stipulated the Seller would not pay for any repairs, we were able to convince them to pay the entire amount!
You should also know that the Sellers in a foreclosure will require a Buyer to sign an Addendum to the Purchase Contract that essentially replaces all of the Buyer’s rights established in the Arizona Real Estate Purchase Contract. The Addendums are very one-sided and completely favor the Seller. Every Lender has their own Addendum, so each must be carefully evaluated to ensure that a Buyer’s interests are protected and that you comply with the terms and deadlines in the contract.
In conclusion, Foreclosures can present some of the best values in this market, but you must exercise both caution and discipline in evaluating the properties. Professionals are a MUST, including Home Inspectors, Registered Contractors and a full-time, professional Realtor with experience and knowledge of the community.

I hope this helps.

Rob Hallberg
Long Realty
1 vote Thank Flag Link Sat Jan 31, 2009
Hi Ange,

I can see that you are really thinking through your decision and that's a good thing. As long as this current economic slow-down is temporary, prices in all neighborhoods will eventually increase. The important thing to know when going into a neighborhood that is experiencing a lot of foreclosures is the STAGE that the neighborhood is in. Have homes just started being foreclosed in that neighborhood? Have prices been dropping there or have they been stable so far? When were most of the homes purchased in that neighborhood?

If most of the homes in the neighborhood have already foreclosed or been sold as short sales, then it is likely that the prices of today are about as low as they will go. However, if the neighborhood has been somewhat stable and they are just now starting to foreclose then it is likely that prices will slide for a while. The age of the homes is important because a few years ago builders were enticing purchasers with creative financing which had the effect of getting a lot of people into mortgages that they would eventually not be able to afford. These are typically the areas where entire neighborhoods have been foreclosed.

It is important to analyze not just current market value and whether you are buying below today's value, but also what tomorrow's value may be looking at the trend in that particular area.

When considering a foreclosure, you will also have to take into account the condition of the home. Some foreclosures are in terrible shape, but some are in move-in ready condition and at times are in better shape than some homes sold by individuals. I just closed a deal with a first time home buyer who bought a foreclosure in awesome shape. She was able to finance with an FHA loan and they did NOT require any repairs.

With a foreclosure, there is less information available to you about the condition of the home because the bank owns the property and they did not live in the home. Therefore, you must be very diligent about the inspection process. It can still be worth it; you just have to be thorough.
1 vote Thank Flag Link Sat Jan 31, 2009
Ange, The last question, " Is it safe/wise to buy a foreclosure?" If that's the path you end up on in order to find what you want at a price you can AFFORD then absolutely yes... The other part of your concern was buying in an area with many foreclosures.

Services, Police, road crews, fire dept. ect.. depend on what? If buget declines are significant then what happens? I'm seeing these things discussed every day where I live, have already seen county and city layoffs,
and my area is better than many financially, for now..

IMHO it is an important factor to consider for anyone buying to consider. What is he outlook for services in the area I'm interested in for the next few years? Might be a good question for anyone you might interview to work for your interests..

Just an opinion, Dunes...
0 votes Thank Flag Link Sat Jan 31, 2009
Hi Ange, I think you are absolutely correct. Who knows what'll happen to these neighborhoods, BUT, you can't even build these homes for the prices they are selling at. Do your research, and have a realtor you trust as a consultant to help advise and to show you statistics e.t.c. for the area. You can't predict the future but you can make an informed decision. By the way, there are foreclosures in old established neighborhoods too . . . :)
0 votes Thank Flag Link Sat Jan 31, 2009
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