What are the Pitfalls in buying FOreclosures?

Asked by swansnest2, Santa Ana, CA Wed Feb 1, 2012

What do you need to do to protect yourself and how do you get the former owner out of the house (w/o dismanteling it)?

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Kawain Payne’s answer
Kawain Payne, Agent, Seal Beach, CA
Mon Mar 19, 2012
The main pitfall to buying a foreclosure is the seller (the bank) has never lived in the home so they cannot give you any history on the condition of the home. The homes are truly sold "as is". The bank often times will not make any repairs. In some cases they will not even do termite work.

Another pitfall is if you are buying using a FHA loan, some REO homes will not meet FHA conditions for funding. Because the condition of the property does not meet FHA guidelines.

The former owner in most cases has either been evicted or has already moved out by the time the REO property is put on the market, so you will most likely not have to deal with getting the previous owner out.

Best of luck to you!

Kawain Payne, Realtor
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David Chiles, Other Pro, Los Angeles, CA
Thu Feb 16, 2012
Thank for a great question that many potential home buyers have about foreclosures and other distressed properties, how do you protect yourself from the owners interest in selling a non-desirable asset for the highest price possible. Do your due diligence and spend as little of your cash as possible. This means the process will take far longer than purchasing a home in the traditional market.

Due diligence is gathering all the information you need to make a reasonable offer. This includes a loan and lien history on the property as well knowing the cost of fixing problems found in an inspection.

Spending as little cash as possible is the best way to mitigate the risk of purchasing a distressed property because it requires the bank or mortgage lender to assume some of the risk. This is why distressed properties often sell to the highest cash bidder because the banks are betting that prices will fall and don't want the risk.
Web Reference:  http://www.southerncalre.com
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Kawain Payne, Agent, Seal Beach, CA
Wed Feb 15, 2012
Hello Swansnest2

Here are A few things to keep in mind when buying a REO home:

1. REO homes are actually sold "as disclosed". This means the seller (the bank) has no knowledge of the condition of the property ,because they have NEVER lived in it.

2.The seller (the bank) cannot provide any history of the condition of the home.

3.The bank will usually not make any repairs, which can be a hurdle if you are a FHA buyer. Some REO homes will not meet the conditions required for FHA financing.

4.The best thing you can do to protect yourself is to make sure you have a property inspection done. This way you will be aware of all repairs needed prior to closing escrow.

The good news is you can get a REO below market value!!!!!

Best of luck to you,

Kawain Payne, Realtor
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Bob Phillips, Agent, Rancho Santa Margarita, CA
Wed Feb 1, 2012
Swansnest2, you asked: "The Auction is in 3 weeks. What if the current owner is still there after the Auction?"

Two things. I'm pretty sure that the lender is NOT going to auction off an occupied house.

Second, if someone is still in the house, a scheduled auction will probably be postponed. ( While the current owner tries to stall foreclosure through legal means, OR, the lender moves to evict the occupant.)

Eventually, the house will probably sell as a short sale, in which case the owner should be forced out prior to close of escrow, OR, an auction will finally take place. ( Most are postponed many times.)

Are you prepared to pay cash for the property? Do you know if there are multiple loans on the property, and if so, which one of them is the one that is foreclosing? There are a LOT of potential pitfalls with buying a house at either the courthouse steps, or in an arena type of auction.

In MY experience, you may be better off waiting until the bank has foreclosed, and buying it when it comes onto the market as an REO - bank owned listing. If the former owner trashed the house before being evicted, the foreclosing lender MIGHT have to fix the property up, before they can list it.

One prudent move, on your part, would be to align yourself with an agent who really understands the process.
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swansnest2, Home Buyer, Santa Ana, CA
Wed Feb 1, 2012
The home in foreclosure and is to be sold on the courtyard steps - AS IS. My understanding was that there was no Escrow.. The Buyer pays cash and the property is signed over to them at the Courthouse!

The Owner has not made payments for 15 or 16 months and is still in the house. The Auction is in 3 weeks. What if the current owner is still there after the Auction?

The house has to be completely updated -needing at least $175000 put into it. It is a bonus to us to remodel the way we want it.. We saw the house while it was for sale and tried to buy it from the owner but he wanted to make $75000 in his pocket.. He refinanced 4 years ago and has been living on that money.. Our Realtor is not experienced with foreclosures!
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Harold Sharpe, Agent, Menifee, CA
Wed Feb 1, 2012
1. on a foreclosure, the house should already be VACANT. the former own should not be taking anything out of the property.
2. On a short sale, a house that can be in the foreclosure process, your agent should remind the listing agent that there is a contract about the condition and contents of the property.

The Pitfalls of buying a Foreclosure
1. the addendum, or counteroffer by some banks is very one sided. Some banks take a perfectly well done contract made by a team of attorneys in the state of California and dismantle it piece by piece trying to make the contract so one sided, many buyers say no way and kill a decent deal.
2. you will have no history of the property or disclosures.
3. banks are an entity and operate on their time schedule not yours.
4. banks usually choose terrible escrow companies whom they work with on multiple deals and usually have issues.
5. Listing agents for foreclosures work for the banks and will do so next week. so their primary client is the bank. Do not ever think the listing agent on a foreclosure will help you.
6. communication from listing agents who list for foreclosures usually have a slow time getting back to any phone calls and are too busy to deal with a whole lot.
7. there can be hidden issues with a property and once escrow is closed, it is 100% your problem.
8. Some banks choose a home warranty company that is less than desirable than one you can choose.
9. the property you are buying is vacant and vacant homes sometimes have issues with people breaking in and trying to steal items, move in etc.
10. take pictures and video everything as is when you buy the property. do a walk through with your agent prior to signing loan docs and again around 5 days prior to close and again the day before you close. do you best to make sure everything is ok.
11. get a VERY GOOD home inspector.
12 Get a VERY GOOD termite inspection.

as with any property once you bought it, it is yours.

Harold Sharpe - Broker
So Cal Homes Realty
(951) 821-8211
California Department of Real Estate Broker License # 01312992
0 votes
Matthew Bart…, Agent, Glendora, CA
Wed Feb 1, 2012
Hello Swansnest,

With foreclosures you are buying the home "As Is". The bank will not in most cases be willing to make any repairs. Furthermore, most of the standard disclosures do not apply with a foreclosure. The bank nor their reps have ever lived in the home so their knowledge will be very limited with regards to the homes condition. Your inspections while always important when buying real estate, become even more important when purchasing foreclosures. Make sure your Agent is experienced in foreclosures so that they may walk you through the process. Best of luck!

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Allison Fish…, Agent, Ann Arbor, MI
Wed Feb 1, 2012
when buying a forclosure you often times will be getting a home at below market value which can be a good thing. However with that being said you as the buyer are taking the property AS-IS, so any city requirements, or repairs are taken care of by you. As far as the seller dismanteling it, well that does happen and there is not much you can do. I would look for a knowledgeable realtor in the area you are looking at to help you through the process.
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