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10 painful realities about the foreclosure process

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Many buyers believe that the path buying a great home is purchasing a foreclosure. For a buyer who has done his or her homework, a foreclosed home can be a great buy.

But often, buyers are misinformed about the realities of the foreclosure process. Because of improving market conditions increasing efforts to prepare and market homes to owner-occupants, not all foreclosure properties are true bargains.

What should your buyer clients know about foreclosure?

1. Like Forrest Gump said, “You never know what you’re gonna get”

Because the bank has never occupied the property it is selling, it has no background about how the home was maintained or of the condition of the property. Most foreclosure properties are sold “as-is,” which puts the burden of inspections and due diligence on the buyer.

This is why it is critical for buyers to conduct inspections and fully investigate the property and neighborhood. Buyers should even consider talking with neighbors to try and get as much information about the property’s history as possible.

2. Not all financing is created equal

Properties must meet certain lending requirements based on the condition of the home to be certified for financing.

For instance, a home with broken windows, no flooring or no heat source might prohibit a lender from moving forward with many of the standard loan programs available to buyers.

3. The process can be tedious and lengthy

Every bank and institution has a foreclosure protocol. Some are more efficient than others. Depending on the entity, and oftentimes the individual asset manager, you and your buyer could face a smooth transaction or a long, drawn-out nightmare.  

4. Buyers might have more upfront costs

A selling entity might offer the buyer a credit for costs on the closing statement, but most banks or selling entities will not pay any upfront costs involved with facilitating the transaction.

Upfront costs for inspections, appraisals or even utilities might be the initial responsibility of the buyer.

5. Want repairs? You’re out of luck

Most foreclosed properties are sold “as-is.” A bank might work with a buyer to negotiate the cost of a lender-required repair. In return, a buyer should expect to be asked to offset the repair cost by either taking a reduction in his or her closing cost credit or increasing the sales price.

6. Think you can get a deep discount? Think again

Not all banks will take a deep discount to move a home. Many banks and selling firms do their homework and consult with their listing agents to prepare opinions of price before listing the home.

Many of them are priced at market value, and a buyer should expect to pay close to the asking price if they want the home.

7. Think twice, and the house might be gone

Because many foreclosures are priced at market value, in good markets, many of them will sell quickly. If a buyer finds a foreclosure property he or she might be interested in, it is important for them to move quickly.

They should be prepared to make an offer to reduce their chances of having to compete for the home or losing out altogether.

8. An inexperienced agent can muddy the waters

An inexperienced agent is not a bad agent. But, an agent experienced with foreclosure properties is an asset.

An experienced agent will know how to structure an offer for a buyer so it is favorable to a bank. He or she will also have an idea of what upfront issues might be called out by an appraiser or will know what prep-work to do with the title company to check for issues that might hinder the closing process.

9. Need utilities for inspections? It’s your problem

Some banks make the buyers responsible for turning on utilities for their inspections. In some cases, a buyer should be prepared to work with the utility companies to pay connection fees to have the home inspected.

10. Title work can be a problem

It is important to do a little investigating at the title company before submitting an offer on a foreclosure. Not all banks and selling entities are efficient when it comes to having all the appropriate title work in place before listing the home.

Outstanding liens or chain of title issues could be discovered when escrow is opened — causing delays in closing.

Hopefully, these tips will help your buyer know what to expect. Pursuing foreclosure properties for your buyer can be a great find when the buyer has the right expectations and mindset going into the process.

Kellie Tinnin is a real estate agent in Albuquerque, New Mexico. Follow Kellie on Twitter @KellieTinnin.

Email Kellie Tinnin.

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