Last week, when Amanda Kostina laid out her 10 Hidden Hazards When Buying Foreclosure, it hit close to home. My husband and I relocated to Florida in the midst of the credit crunch, and what awaited me in my new home state was a depressed real estate market. Even though foreclosures had always been part of my repertoire, nothing could prepare me for the crash course I was about to get in the owned-asset market.
At my five years at Michael Saunders and Company, we have managed and sold an extremely high volume of properties for financial institutions and government sponsored entities (GSEs). And I have found that despite the inherent stigma that comes with purchasing a foreclosure, REO properties are a great opportunity for buyers, especially first time buyers.
That’s because there are built-in incentives to revitalize the area. All GSEs, and most banks, offer programs called First Look Initiatives. These programs allow for owner occupants to have first crack at their listings over buyers who are looking to purchase a listing as an investment. The hope is to pass the property to stable, caring owners. In fact, Freddie Mac has a policy to repair at least 65% of their inventory, seeking to rejuvenate the neighborhoods where their properties are listed.
With those improvements comes some assurances of a relatively-smooth transaction. My foreclosure sellers provide disclosures of anything they are aware of, or have been made aware of, with the property, as well as ensure all liens are satisfied and code issues are rectified, and pass clear title.
Now, while the hazards Amanda listed are present, I don’t know if they’re necessarilyhidden. After all, if there are holes in the walls or the electric is off, you’ll know. But there are some precautions you can take to navigate some of the unseen, volatile waters of owned-assets.
Find an Agent Familiar with Foreclosures: An agent who doesn’t know the process and/or the seller’s contracts and policies could slow or derail an otherwise sound transaction. A trusted, experienced Realtor® can steer foreclosure buyers clear of unspoken pitfalls, and ensure an expedited process.
Get a Home Inspection: Many buyers feel that, because they are buying “as is” property, a home inspection is a waste of time and money. Not so. Having the home inspected will uncover problems within the inspection period. That’s important, because should you want to cancel the contract and it’s outside the timeline, some REO sellers will keep the earnest money deposit.
Consult with an Attorney on Your Contract: Many buyers don’t have an attorney review their contract because they’ve been told that REO sellers won’t allow any changes to it. That is definitely true: changes aren’t allowed, but, if you sign without fully understanding the contract, you (and your selling agent) might be surprised by what you’ve bound yourself to. For example, 99% of the sellers of properties we list have a policy to turn on the water and electric if possible. It is not guaranteed that it will be. Not even for inspections. So, if the plumbing is cut out, don’t expect the house to be re-plumbed because you have to have utilities on for inspections. No, you don’t, and the contract addendum you signed probably says so.
In any real estate transaction the buyer should beware, and that rings particularly true when purchasing an REO. But working with a Realtor® who is well versed in the REO market can allow buyers to see the benefits of purchasing a property that has been foreclosed on, and many times, those benefits can outweigh any potential “hazards”.
By: The crew at KCM