Ask the Expert: Buying Foreclosures, Real Estate Auctions

Q. I’m a first home buyer. I want to buy a foreclosure home. They seem to be the cheapest. Your thoughts?

A. I’d like to speak about one aspect of foreclosure purchase that isn’t often addressed: Should you even buy a foreclosure?

You can buy foreclosures for as much as 30% or 40% below market, but most foreclosures sell for less than 5% below market. That small savings may be offset by other factors in the transaction.

Price-conscious home buyers are lured by the low prices advertised for properties in foreclosure. They hope to show up at the auction and win the lowest bid. Before you rush forward to buy a foreclosure, stop to think about some of the drawbacks and repercussions of a foreclosure sale.

For most consumers, purchasing through the foreclosure process can prove daunting. Good buys are available, but they require research, preparation, patience and persistence. And retail sales are priced using the very same comparable sales, so their price is often comparable.

The foreclosure process starts when a property owner falls behind on mortgage payments. Many owners of homes that go into foreclosure have been struggling financially for almost a year before they give up, which usually means that the house has not received needed repairs or general maintenance for a while.

This may run the entire spectrum of issues, from missing light bulbs to roof leaks. Trash in front yards, dead landscaping, broken appliances and windows, and dirty carpets, floors and walls are found in properties even in very affluent areas. Homeowners who are angry about losing their house have been known to remove fixtures, cabinets, appliances, even the tub or toilets. Walls may be broken, and pipes for the plumbing removed.

Houses in poor condition might fetch bargain prices, but repairs can boost the cost again. Any savings in price is eaten up by cash that must be put into the property to make it habitable. If this is a first home for you, and you are living on a tight budget, your purchase may leave you no money afterwards for major repairs or upgrades. In that case, a “retail” purchase (one where the owner is the seller, as opposed to a bank) is a much better solution for you.

The first rule of real estate, (“location, location, location,”) applies here. If there is trash in every room of the house, but the property is in a good area with highresale values, hold your nose, walk through the entire house and consider making a low offer.

Be sure you know who is living in the property. If the property is occupied, the successful bidder is typically responsible for removing the occupants, who may not be the previous owners. They could be relatives or friends of the owners, renters or squatters. These tenants have rights. Be sure you are aware of all local ordinances that may apply, because you might have to evict them. If you are unfamiliar with eviction processes, you should hire a lawyer to handle it for you.

Because these homes are purchased “as is” from the lender or HUD, there is no guarantee of condition, and properties are often sold “as-is”, with no warranties. Sometimes it is possible to inspect these homes prior to making an offer, but sometimes access is not granted.

If the property is in poor enough condition, it will not be eligible for many loan programs that would otherwise be attractive to a first time home buyer, including FHA. Some foreclosures are advertised as “cash only” purchases for this very reason; no lender will make a loan on the property.

Buying foreclosures is not for the faint of heart. It’s best handled by the pros and is not recommended for first-time homebuyers. This information is meant to prepare you for the reality of the foreclosure market.
If you still feel a foreclosure is for you, I would urge you to do the following:

1. Speak with a mortgage broker who is knowledgeable about lending on foreclosures. Get pre-qualified with several different loans you could use, depending on the overall property condition.
2. Hire a great Realtor as your exclusive buyer’s agent. Have them run a property profile or preliminary title report on each property you are interested in, as well as a complete market analysis. Be sure that the “bargain” you are buying is really a bargain.
3. Speak with a home inspector and a contractor, so you are sure you know the condition of the property and the true cost of repairs.
4. If you can’t see the home, don’t buy it. If it’s not a bargain, pass it up.
5. And please, remember to look at those retail sales. In the long run, it may be a simpler, happier way to go for a first time homebuyer.

Q. I seem to be seeing more and more real estate auctions in my area. Why?

A. Auctioning properties can be an effective sales method for trust sales and distressed properties, and now non-distressed and luxury properties are following the trend. Auctions offer the following advantages, making them a win-win for buyers and sellers alike:

1. Move it Fast! Once the time and place of the auction is set, interested buyers are gathered all at once in either a live or online venue. A typical live event can be completed from beginning to end in about 1-4 hours, making auctions a quick and effective method of selling a home.
2. Motivated Sellers. Selling a property at auction eliminates long term carrying costs for the seller such as property taxes, continued mortgage payments, insurance, and maintenance costs.
3. Predetermined Sale Date. An auction date is set for the property so all parties have a clear timeframe to work with.
4. Luxury Sells. It’s a common myth that auction homes are either foreclosures and/or dilapidated properties. Luxury properties can generate serious interest and top dollar from bidders.
5. Eliminate Price Negotiation. The time and energy spent on offers, counter-offers and counter-counter-offers on price is absent from the auction process. Can you remember the last time you bought or sold a home without discussion or debate over price?
6. Bring on the Competition. Auctions create a sense of urgency and excitement, stimulating buyers to seize the moment and take action or the opportunity will be lost. Competitive bidding can serve as instant confirmation of value by fellow bidders, driving the sale price to true market value.
7. See Homes in Person. Up to 3 open house events are offered prior to most auctions, so buyers can tour the home in person prior to bidding.
8. 8. Banks are Motivated. With an abundance of foreclosures on the market, many houses are being placed on the auction block that may be acquired at significantly lower prices than through traditional real estate transactions.

Deborah Bremner
The Bremner Group at Coldwell Banker
REALTOR, 00588885,
ABR, CDPE, eAgent, CSP, SFR, HRC, CRE
(O) 310-571-1364 DIRECT
(D) (310) 800-2954
Accredited Buyer Representative | Certified Distressed Property Expert | Pre-Foreclosure Specialist Certified

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