Foreclosure, Bank Owned, Bank Repo, REO (Real Estate Owned) - all terms for what we will collectively call "foreclosures" - real estate where the owner has defaulted on the mortgage payment, the mortgage lender has "called in" the loan, re-possessed the property, and is now selling it to recover as much of the outstanding debt as possible. HUD Homes are slightly different - see further below.
The number of foreclosures escalated towards the end of the 2000's, and the high volumes have continued for several years as a result of the troubled economy, falling house prices, the resetting of adjustable rate & fixed rate mortgages, and tighter controls from the lenders restricting the ability to refinance. Also, increasing numbers of homeowners deliberately defaulted on their mortgages and "walked away" because the home value was significantly less than the amount of the mortgage, and they saw no hope of recovery.
The significance of foreclosures in the market is two-fold:-
- at one point foreclosure sales came to represent over 65% of total home sales in Warren County, VA. Though the numbers have now dropped closer to the 20% to 25% range, this is still a siginificant number.
- the very nature of foreclosures pushes prices down, and can have the effect of devaluing a neighborhood generally
Foreclosures can be a great opportunity . . .
Foreclosures can provide a great deal for the right buyer :-
- banks don't want to be property managers - most will price a foreclosure to get it sold, which will often mean a price below the "typical" market level seen among similar homes that have sold recently
- as a result, you may be able to purchase a nicer home than you might otherwise have expected
- some foreclosures have little or no work required on them, or maybe only cosmetic items that can be easily addressed by most home owners with minimal cost and a little elbow grease
- other foreclosures may require more substantial work, but are priced at such a significant discount to the market that they offer the chance of a nice capital profit to the buyer who is capable of dealing with the issues
. . . but they are not for everyone . . . buyer beware!
Set against the benefits, there are some issues that you need to be fully aware of :-
- you are buying strictly "as-is". Most selling banks allow home inspections "for information only" after ratifying a contract, but some insist that your offer is a full "clean" commitment to buy. Either way, there are no come-backs after you buy
- the condition of a foreclosure is often (but not always) poor. If people weren't paying their mortgage, chances are they weren't looking after the home either. Common features are trashed flooring, appliances and light fixtures removed, damaged dry wall, badly done home projects, etc
- the condition of the foreclosure property may affect its eligibility under some mortgage finance, especially government-supported schemes like FHA, VHDA, USDA, and VA. This relates particularly to major code issues and certain "habitability" issues, where required work must be addressed before settlement and in most cases will not be completed by the selling bank
- many selling banks will insist that the buyer pays certain closing costs that would normally be paid by the seller. Examples are grantor's tax, and the regular tests for water, termite, and septic inspection
- not all foreclosures are a bargain. Some come to the market priced far too high, and are NOT good value. Don't assume that because it is a foreclosure, it must be a "deal"
- foreclosures that are priced "right" often generate competing multiple offers, resulting in a request for the buyer to present their "highest and best" offer
- most foreclosure banks respond to offers fairly quickly these days, but there are some that can take a while. As a buyer you may have to be patient, and understand that while you are waiting, other offers may come in and trump yours
HUD homes are not strictly foreclosures, though they share many of the same features. They are homes that have been foreclosed on by a mortgage lender, and then sold back to the Department for Housing & Urban Development, who had originally insured an FHA mortgage on the home.
The procedure for buying a HUD home is a little different to buying a foreclosure. You need to make your bid through a HUD-approved Realtor (I am HUD-approved), and the process is highly automated. Bids are simply accepted or rejected outright by HUD, and there is no back and forth with counter offers or negotiations.
You also need to be aware that when HUD accepts your bid, you are committed without contingencies. You have no fall-back if you cannot finalize your finance, and although you may be given a short time to complete a home inspection, you need to be sure that the home will meet the condition required by your mortgage finance, especially if it is Government supported such as FHA, VA or USDA.
Where do we go from here?
If you're aware of the reservations set out above, and remain interested . . .
- unless you will be paying cash, you need to be pre-qualified for your mortgage finance. When you find a foreclosed home that you wish to make an offer on, you will need to move fast, and no bank will accept an offer from a buyer who is not pre-qualified.
I can help you with this, but it must be your #1 priority.
- note also that some selling banks will insist that you are pre-qualified through one of their own branches or loan officers. That would not obligate you to take out the mortgage through them, but they would not consider your offer without their own pre-qualification.
email me or call (540) 671-1367 for an up-to-date list of foreclosed properties in the area
- I am happy to go through the buying process with you, and explain how this differs from the purchase of a "regular" sale
- I am happy to work with qualified buyers in all price ranges
- Let me know how I can help you!