Why shopping ONLY for a foreclosure//bank owned property is a bad idea

These days, I get lots of emails and calls from buyers who say “I only want to buy a foreclosure property.”  This always makes me groan a little inside, because it is the sign of someone who is reacting to all the media hoopla and really doesn’t understand all the issues involved in foreclosure sales.

The reality is that you don’t want to limit your searching to just foreclosure properties.  Foreclosure properties and bank owned (REO — real-estate-owned) properties often have a number of things going against them:

  • In the case of REO’s, the Seller (the bank) knows absolutely nothing about the property and will not take any responsibility for disclosures.  You are buying a pig in a poke, with no information as to anything that may be wrong with the property.  Your inspections become so much more critical in this case, because you don’t even have the disclosure statements to give you a clue as to what to investigate.
  • Both foreclosure homes and REO homes have typically had neglected maintenance for a long time, as the previous or current homeowner was short on the cash that would have been required to keep the place up.
  • These homes by definition are generally in an area where the property values have fallen.  If they had held, the homeowner would most likely have been able to renegotiate a new loan, but because they became “upside down”, then they couldn’t refinance.  Since the first rule of Real Estate is of course, Location, Location, Location — do you really want to buy in a neighborhood where prices are dropping?  Especially when so much of the South Bay has held its’ value over the last two years?  Remember, when you are the owner, the same effect will apply — the areas that held value will go up faster than the areas that dropped during these last few years.
  • The banks are notoriously difficult to negotiate with.  While you submit an offer on a short sale, the banks typically are waiting to review the offers at one time.  So there might be a number of competing offers, and you are only one of the offerors.  When negotiating, it is always better to be one-on-one rather than many to one.

That’s not to say that sometimes the best home for you isn’t a short sale property or REO.  My point is that you have to tell your Realtor what you are looking for and how much money you have to spend and let her (notice I use her , ’cause of course you’re gonna hire me, right :->  )  use her expertise and market knowledge to find the very best property that the market has to offer, regardless of whether it is a short sale or not.

Sometimes the better deal will be a non-foreclosure house that is lingering on the market because it is ugly inside, when all it needs is a cosmetic makeover (and most buyers lack the imagination to see what to do.)  I once got a terrific buy on a home because it reeked of cat urine and most people couldn’t hold their noses long enough to complete the tour!  But rip out the ratty orange pee soaked carpet and the furring strips that went with it, sand down the solid oak hardwood floors underneath (replacing the sections that had pee stains of course), add new bath and kitchen cabinets, plumbing fixtues and appliances, and this house looked gorgeous — and sold for a lot more money.

I know that foreclosures sound like a way to get a bargain, AND THEY CAN BE!  However, please don’t tie your Realtor’s hand behind their back by telling them you only want to look at foreclosures.  Instead, get prequalified, figure out what YOU can comfortably afford, and then figure out what kind of house you’d like to have.  Discuss these needs honestly with your Realtor and target the parts of town you might reasonably find the kind of home you are dreaming of for the price you can afford to pay.  Your Realtor, hopefully me,  may know of homes that are NOT foreclosures that might still be just right for you.  Or we may know of properties that might just be about to become short sales.    Give me a chance to earn my commission, and let me find you the house based on price and location and not just on some arbitrary criteria about its’ legal status.

About Lauren Perreault