Are Foreclosures A Smart Buy?

With all the talk these days about foreclosures, I think it's pertinent we delve into the ins and outs. First, I want to separate foreclosures from short-sales.

In a short sale, the person still owns their home, and is involved in the transaction--however, they have notified the bank (or other lien-holder) that they are no longer able to pay the mortgage. The reason it is called a short-sale is that the value of the home is "short" of what they owe. For example Mr. and Mrs. Smith own a home and are no longer able to pay their mortgage. The home in this market is worth 90k, but they paid 110 3 years ago, and owe 100k still. The bank is allowing them to sell the home for 90k and will 'write-off' the rest of the loan. This is often a quicker and much less expensive alternative for the bank and is why they entertain the idea. Short-sales typically sell for less than a traditional sale, but more than a foreclosure. Purchasing one can be a long and arduous process because the bank has to approve the transaction, as well as the owner. This can get even more fun if there is more than one lien-holder. Short-sales are very much worth looking at, and can be a great deal. However, the buyer must understand that their time-frame is not of importance to the bank. Things will happen as they happen and can be extended significantly from a traditional sale.

In a foreclosure, the bank has actually taken possession of the property. Without going into too much detail (and the process varies between KS and MO) the bank becomes involved with the courts--explaining their mortgagee isn't paying anymore. The bank then often becomes owner of the property. Foreclosures can be sold at well below market value, however, they can also need a lot of work. Often before leaving, former owners trash the place and cause extensive damage. Additionally, these properties can sit empty for an extended period of time. All offers and contracts go through the bank (or their agent) and can take some time to be approved or countered. Also, do not expect to receive a seller's disclosure in this case, as banks will NEVER issue one.

So....are these two types of properties worth looking into? YES! You can get a great deal on a great property, often in a great neighborhood. There are even special loans from FHA which help you fix many of the problems (ask about FHA 203(k)). The main thing to remember when looking at both foreclosures and short sales is that you must be willing to look past some blemishes and also be willing to close later than expected.

As always email me with any questions or comments about any of your real estate or finance concerns. I'll be happy to help where I can.