Buying Foreclosed Property--Big Value--Substantial Risk

A current way to get a really good deal is to buy a property that is owned by the lender after a foreclosure.  These properties are frequently available for about 1/2 of what they sold for several years ago.  In my opinion, such a property may be worth 60% of the old value, with a very real possibility of going up to 70% of the old value (Be careful! Some of these properties may not even be worth 1/2!).  There are some other real concerns about such properties.

One thing is that the title to these properties are frequently not clear.  The contracts frequently require that the lender's title agency close the transaction.  This is because these title agencies frequently are papering over real title problems.   (Our experience is that this is the case over 1/3 of the time.)  If this happens to you, you may find that your next transaction on this property may be put on hold for a year or so while the problem is cleaned up.  Your title policy will require the insurer to clean up the problem, but your delay damages will be your loss.  We recommend that you obtain an independent search and examination of the title.  You want clear title, not a claim on a title policy.

Another common problem is that many lenders will be outrageous in requiring you to pay various fees and costs at closing.  This applies without regard to what the contract says.  Most lender addendums allow the seller to be arbitrary, and to say, "Take it or leave it!"  One wise lawyer phrased it as "In a foreclosed property, the buyer sets the price and the seller sets the terms."  Budget $1,000 for such theft.

These issues make representing buyers time-consuming and expensive.  Work a $3,000 margin into your bid to cover this.

This is all in addition to issues of the physical condition of the property.  You should have the property carefully inspected for issues such as defects and mold.  Go with the inspector and discuss the inspection as it happens.  The inspector will do a better job, and you will get a much better understanding of the issues.  The sale will be "as is" and foreclosed properties have such problems at a much higher rate.  Work $5,000 into your bid to repair unexpected problems.

For this reason, you must work a substantial margin in your offer to allow for such issues.  If you are buying a residential property for $150,000 (that sold for $280,000) , you should not go forward unless you would be happy to pay at least $160,000 for it.  This way, if you encounter $8,000 of trouble, you can know that you worked this into your plan from the start.

The bottom line is that these properties have real problems.  To sign a contract, you must be convinced that the property is not a good deal, but a really good deal with margin for trouble.

Bob Sammons, February 14, 2010