Many homeowners have been joining investors acquiring properties at discount via foreclosures, especially as they dominate many of today’s real estate markets in the United States. As you might expect, purchasing a foreclosure comes with opportunities as well as certain challenges.
If you plan to pursue a foreclosure, spend some time discussing the topic with your real estate professional to review these challenges. Texas Ally has experienced agents who have cultivated a thorough knowledge of the foreclosure acquisitions process. In the meantime, it’s always great to inform yourself of the potential difficulties that may lie ahead. Here are a few things to note about the home-buying process of foreclosures:
- A foreclosure is a repossessed property. Technically speaking, a foreclosure refers to the the legal process which a lender repossesses a home for lack of payment. However, practically speaking, when people use ‘foreclosure’, they usually mean the house itself. Foreclosed property is also called “REO” property (Real Estate Owned). The agent who lists a foreclosed property is called an REO agent.
- There are different decision making structures that decide how to sell a property. Most foreclosed property is listed by an REO agent. However, there is often another individual who also represents the bank or entity who owns the property. Usually that person is an asset manager. For large banks, this position can be internal. It can also be outsourced. In the case of FHA foreclosures (also called HUD properties), the government contracted several large asset management companies. The asset manager is usually managing a large portfolio of property for their client to which their goal is to liquidate the property in the most profitable and efficient way possible. Each bank and asset manager has a unique process (and contracts) to sell these properties, though there are some unifying characteristics of all.
- It is a very impersonal process. Be aware that most of these asset managers have hundreds of properties in their portfolios, and thus have developed rigid, if not automated systems to handle all the bids and offers on the properties. There is no emotional calculation or appeal involved on the bank’s side of the selling process; only what will likely bring in the most money.
- Properties often will be damaged. The former owners may sometimes feel justified in pulling out fixtures, appliances, etc. just before leaving the house. Vacant lots also attract thieves and vandalism, so don’t be surprised if you see damaged drywall or missing AC units. This does have a silver lining; most people cannot see past the damage which scares down the price of the property, often lower than what the repair costs would cost. This is how many investors make money on foreclosures, by capturing the difference in equity between the after-repair-value of a property and the total acquisition a cost (purchase price + repairs).
- Expect No Disclosures. Most states require a number of disclosure notices from a seller. However, banks follow a different set of rules and usually give you little to no disclosures about the condition of the property. A thorough and careful inspection is always advised, especially if the structural integrity of the property is in question.