Are Foreclosures Really a Good Deal?

In today’s Central Ohio real estate market, there is one question that home buyers ask with great frequency; “Can you help me purchase a foreclosure property?”  While the answer to this question is always yes, it is often followed by an extensive series of my own questions.  One of the first questions I ask is...How do you define a “foreclosure”?  Foreclosure – is actually a legal proceeding that bars or extinguishes a mortgagor's equity of redemption in mortgaged real property.  While traditionally foreclosure has a very technical meaning, it has more recently become synonymous REO or Bank Owned Property.  Some of the items that a home buyer may want to consider when buying a bank owned property are listed below: 

1.  Are you looking for a “fixer-upper”?  About 9 times out of 10, a fixer-upper is exactly what you’ll be getting if you purchase a home that has gone through the foreclosure process.   For reasons unknown to me, many of these types of properties have been neglected by their previous owners and often contain latent defects.  Another important note is that bank owned properties are often sold “as-is”.  Often times “as-is” means that a potential buyer could be faced with up-front expenses prior to purchase and a difficult decision, even after they’ve paid for inspections and appraisals.  It’s not unheard of for a buyer to discover a critical flaw during inspections that may negate any discount that was negotiated prior.   

2.  Carefully consider your resources and level of skill if you decide to purchase that “fixer-upper”.   It is always a good idea to do some preliminary research before plunging head-long into a Tom Hanks style “Money Pit.”   While you may have excellent vision, consider carefully how much you have in your budget before purchasing a home that is going to need a lot of work.  Purchasing a project home with exceptionally ornate features is one of the most common mistakes that occur.  Many home buyers become entranced with visions of grandeur and sorely underestimate replacement costs, as well as, the amount of labor it will take to restore these particular items.  The icing on this resource draining cake; you may run the risk of over-improving your home relative to the market value in your neighborhood.  

3. How much can I expect to save on a foreclosed property?  Unfortunately, the answers you may receive to this question are likely to vary greatly.  How much of a discount one receives, relative to fair-market-value, depends largely upon a couple of major factors; condition and location.    

If the subject is located in a very desirable area where foreclosures are few, expect a minimal discount.  It’s entirely possible that a bank-owned property could sell for very close to market value.  If purchasing a home in a less desirable or stable area, it’s likely for a buyer to receive a steeper discount.  However, keep in mind that that particular market may still be actively declining and the perceived risk is typically higher in those areas.   

The discount you receive due to condition is many times only a hand railing, plumbing, or furnace repair away.  However, occasionally a home will call for just a wee bit more.  It’s often times the homes that have decrepit foundations and mold ridden interiors are the ones that sell for the steepest discounts.  These orphans are typically purchased by investors with formidable experience and they often require large up-front cash investments.  

So, are foreclosures really a good deal?  The answer to that question is……YES!   If you are patient and educate yourself properly, it’s entirely possible for a home buyer in today’s market to find a foreclosure with value.