I regularly get emails from prospects and clients about great foreclosure deals they would like me to help them with (you can easily find listings like that on sites like Zillow and RealtyTrac.) Often, the list prices quoted are fantastic and at a significant discount from comparable homes. After all, if a home is listed as a foreclosure to be sold at auction asking for $200,000 and the market price for a comparable home is $400,000, who wouldn’t want the cheaper one?
More often than not those great foreclosure deals are actual preforclosures. A preforeclosure is a home where the bank has initiated foreclosure proceedings. The actual foreclosure will happen if the owner is unable or unwilling to pay what is owed the bank. If a home goes through all the way to foreclosure (they often do not for various reasons) it will be auctioned off at the county courthouse steps.
In many cases the preforeclosure is taken back or purchased by the primary lender and then put back on the market with a Realtor at a later point. The banks will typically clear up any other liens, bring the home up to a basic condition, evict any occupants (or pay them to leave) and then list it for something a little below the market price. For most purchasers, a foreclosure listed with an agent is the best way to purchase as the risk is less and obtaining a mortgage is possible.
For those willing to take the risk at the courthouse step, possible pitfalls and dangers include:
- Additional Outstanding Liens/Violations
There could be other outstanding fees and liens against the property that survive the foreclosure (like IRS tax liens.) Depending on what lender or entitiy initiated the foreclosure, there may still be other more senior liens that will not be extinguished in the foreclosure. One way to reduce the risk of this would be to pay someone to do a title search ahead of the auction (like e.g. a title company.)
- Limited Knowledge of the Property
The home is likely occupied and/or locked. So, in most case you will have to buy the home without seeing the inside. There could be major issues with the home like foundation issues, flooded basement with mold, collapsed sewer, broken septic etc.
- Issues with possession even after you purchase
The old owner or a tenant may be in the home and you may have to spend time and money to evict. Owners/tenants do have rights after a foreclosure, in particular if you are buying as an investor.
- Patience and time needed
Auctions get cancelled last minute all the time. The initial list of properties may have had 20 properties and come auction day there may only be a couple left actually selling. On those, the mortgage holder may ending up purchasing a large protion of whatever properties are left.
- Cash Needed
You will need a large amount of cash available at the day of the auction if you purchase a home. You may have only 15 days to close after the auctionso you very likely will need cash (or some other hard money loan.) A lender typically need more time and getting access to the property for an appraiser may be difficult.
So, my suggestion would be to purchase the home when it is listed by an agent after the preforeclosure. Then you will be able to get inspections, title insurance and a mortgage that should protect you from most of the issues with preforeclosures.