Foreclosure
Credit: Taber Andrew Bain on Flickr / CC by 2.0 with attribution

In recent years the economy and real estate market significantly dropped and then went back on the upswing.  An effect, however, was the huge upheaval created a ripple effect on other economic factors. Unfortunately, this previous large dip in the market upset led to many homes being listed as foreclosed or fast sales.

Currently, the foreclosure rate is declining, but still much higher than it was before 2007.  It will take time to recover. In November 2014, 1 in every 1170 homes went into foreclosure in the United States.1

As lenders try and sell properties they have foreclosed upon, the institutions typically want to just get rid of the properties. This is primarily because these businesses are in the banking industry, not the real estate market. As a result, the prices of many foreclosed homes immediately land in a more affordable range for those individuals who may not have been able to buy a house before, or are looking to purchase an investment property.

At first glance a foreclosure may be appealing, but before considering buying a foreclosed home, a buyer should be aware of the things to watch out for before going ahead with initiating purchase.

Foreclosure
Credit: Daniel X. O'Neil/CC by 2.0 with Attribution

If a normally higher-priced house is in a very low price range, this often can mean there is likely a reason why the price has been lowered to a much more attractive pricing range than other similar homes.

Watch out for these red flags:

1. Deals Too Good to Be True

While it is true many foreclosed homes are priced to sell fast, most of these houses fall within a reasonable and fair market price range. They may be on the low side, but not so outrageous that it looks like a total giveaway.

Occasionally, homes are listed at a ridiculously low price, but if one seems too good to be true, chances are there may be a lot wrong with the house beneath the surface. While foreclosures almost always need some sort of work, many of them have damages that far exceed the savings made on the foreclosed price. You'd be better off buying a higher priced house without the issues.

During the real estate crash our lease was up and we needed to find another place to live. We looked at a fantastic foreclosure deal, knew there would be some work entailed based on damage obvious to even an untrained eye, but even with that, the price was still pretty attractive. Upon closer inspection though, it was discovered there was a lot of mold lurking in an upstairs room ceiling (which was kind of hard to see at first - our agent was the one that picked up on it during a follow-up visit). Turned out the home's siding was damaged and it looked like water had been coming in that way.  Our real estate agent estimated the total damages, mold plus other unrelated items she noticed, would be in the range of $50K or more to repair. She originally tried to talk us out of this house on the first visit and by the second visit, we realized just how right she was about this place.

2. Neglected Homes

As homes go into foreclosure original owners tend to not always maintain or take care of the home. It is common to see things broken, holes in walls and other cosmetic damages. 

When looking at foreclosures, look carefully at the cosmetics of the home. For instance, is there thick coats of white paint in every single room to cover flaws? It is common to see this in foreclosed homes to make the house look more appealing and mask damages; in reality there might be lots of flaws hiding beneath those layers. If you are looking at a house that is empty  and everything is painted white (looks "sanitized"), this may be a red flag of underlying issues with the house.  White paint throughout the home does not necessarily mean "bad", but it's always a good idea to just take a closer look at things.

Some cosmetic damage is understandable, why would someone sink money into a property they are in the process of losing to the bank? However, you do not want to buy a house that has lots of problems or one that has been trashed.

3. House is “As Is”

Depending on who is doing the selling, there are some foreclosures where scrutiny and/or appraisal of the home prior to the sale is not allowed. Other cases it is allowed, as bank-owned properties do typically allow inspections. 

In homes sold "as is", this is a caveat attached to the conditions of the sale. In this case the buyer may or may not have no idea what they are in for as they purchase the house depending on how the house was purchased (i.e. auction vs. bank-owned). In the "as is" scenario, there is usually no negotiation about getting damages repaired and/or major problems fixed. The burden of this typically will fall to the buyer. Additionally, in order to get a mortgage, lots of inspections and other procedures are required; this may mean out-of-pocket money will need to be spent in order to do this.

House in foreclosure
Credit: Daniel X. O'Neil on Flickr/CC BY 2.0 with attribution

Once the purchase is complete and ownership is transferred, the new homeowner may find fixtures have been swapped, heating and cooling systems are not working, or there are serious electrical or plumbing issues. Additionally, chances are appliances are in poor shape. The home may come with a lot of maintenance and cosmetic work.

Before buying, a buyer may want to consider how much is actually saved on the purchase price of the foreclosure and then decide if the potential repairs bring the cost of the home aligned to the prices of those in move-in condition. It may be easier, more cost-effective and less work to know what you are buying and pay a little more on the purchase price rather than sinking your cash into what may turn out to be endless repairs.

Even more than "as is", beware of "Cash offers only -- no showings and no inspections prior to closing" types of listings. With a purchase as large as this, you definitely want to see up close what you're buying.

4. Price Negotiation

In regular home sales there is usually lots of room for negotiation of the final price of the home. This is not the norm with foreclosures because many people may be bidding on the home and the bank is going to go with the best offer. Experts say banks will usually only lower prices on the homes every three to four weeks. Trying to negotiate on a newly-listed foreclosure likely won't work. The bank will almost always choose the best deal with the least complications.

5. Closing Costs

Banks are likely not going to contribute to the closing costs of the foreclosed home, however it cannot hurt to ask, sometimes they will. Although, this is often a financial responsibility the buyer will have to absorb, further increasing the cost of the home. In regular home sales there is usually room for negotiation of how much either the buyer or the seller will contribute towards these expenses.

Should You Buy a Foreclosure?

If you are looking for a good price and are handy or are prepared to pay to do a lot of work, a foreclosure may be right for you. If you see an extremely low price, beware because you might just get what you pay for.  While foreclosures in general are an unfortunate occurrence, houses going up for re-sale, in some cases, can make a good investment either with the intention to live in it or fix up and re-sell.  If looking at foreclosed properties as an investment, the return on money spent won't be quick, but over the long-term can yield good results if you know what you are doing.  It is not an easy thing to do and the investor really needs to know what he or she is doing. It is not a "get rich quick" scheme. 2

Buying foreclosures may be worth the effort in some cases, but in a number of cases there comes a higher level of risk. If you go into the situation with your eyes open, you'll know what to look for and how to avoid the foreclosure pitfalls.