Buying a Foreclosure? Things to Think About!

I do get a fair amount of questions about foreclosed properties.  There is a general perception that they are going to be the “best deals”.  Maybe and Maybe Not!  Read on to see

Buying foreclosed and/or short sale properties is quite different than purchasing a property placed on the market by a willing seller.  If the willing seller has a good Realtor™ and also chooses to listen to them (very important), then the willing seller usually has an idea about market value and has priced the property to generate interest from prospective buyers.

Foreclosed and short sale properties are available because the purchaser has more debt on the property than current market prices support.  Usually the property is not as well cared for as in the willing seller situation (no surprise here).  The lender wants to get back all their money, accumulated debt and penalties (the value of their note on the books is the sum of all these items, which is obviously more than the property is valued at, or it could have sold)

Many banks start out with this total value as the price they want to market their property at.  Ultimately they reduce their prices to reflect the property in its current condition (remember these properties are usually a little beat up), but this usually takes some time (the longer they sit the more beat up they get).

Writing the offer as a prospective buyer is another place where the willing seller part really helps; willing sellers respond quickly, usually in a day or two.  Lenders frequently do not respond for weeks and even months.  And if they accept your offer they often reserve the right to cancel it at any time if a better offer comes in.  So, any inspection fees or costs expended by a buyer can be for naught (Buyer Beware!)

Lenders often want their own forms used (rather than California Association of Realtors forms which I feel are fair and balanced for both sides of the transaction).  There is a greater risk for buyer’s deposits in these transactions.  The disclosure laws for Lenders are very different as well and, of course, skewed substantially in favor of the Lenders.  There are often surprise closing costs (often in the thousands of dollars) that the banks will say are the buyer’s obligation.

All that being said, there can be values found in foreclosures.  It is a different and riskier process.  Most foreclosures/short sale properties ultimately are listed with Agents and available on the MLS systems.  Those properties that are not yet foreclosed on are announced in public venues as prescribed by law.  Usually the bank gets the property at the foreclosure auction by using a “credit bid” of the amount of the note plus all owed interest, penalties and what not.  If this total amount is a “good” deal, then theoretically the property could have been sold in the traditional manner.

So, if you are in the market looking for an investment opportunity, look for the best deal you can in the MLS systems regardless of it status as a foreclosed property, short sale or willing seller situation.  Nevada County is low on the percentages of foreclosed and short sale properties.  In other areas, particularly those areas where massive building occurred, there are quite a few more foreclosed properties available.  In these areas, the lenders have come to grips with the nature of their properties and have discounted them substantially.  Remember, the best deal does not mean the lowest initial price!

Rolf Kleinhans is a Broker/Realtor™ with Recreation Realty Inc./Sierra Cascade Properties in Nevada City.  Actively involved with the Nevada County Association of Realtors (NCAOR), he has held all officer positions of NCAOR including President, and served at the state level as a Director of the California Association of Realtors.  He has held the appointed position for the Nevada County User Fee Committee (Past Chairman), is currently serving on the Nevada County Sewage Disposal Technical Advisory Group as Vice Chairman, and represents the Realtor’s organization as a member of the Economic Resource Council.  He can be reached at 530-559-5000 or www.SierraCascadeProperties.com.