SHOULD I BUY A FORECLOSURE?

   There are many foreclosed homes on the market so this is a relevant question for any home buyer.  Odds are that a foreclosure can be purchased at a price below market value.  Instant equity is a great thing, particularly if your plan is to resell the home in a few years.
 
  There are two types of foreclosures on the market-those that are owned by the banks that held the loans of the folks that originally owned the houses and HUD foreclosures-or homes owned by the Department of Housing and Urban Development which are primarily FHA foreclosures.   VA also has it's share of foreclosures.
  Negotiating with these entities can be a long and frustrating process-a good real estate agent is a requirement in order to work on these types of purchases. I have had a lot of buyers ask me, "Don't these banks want to sell these properties?" Yes, they do, but on their terms, not yours.

  What are you getting into when you buy a foreclosed home?  There are examples of outstanding homes available on the foreclosure market-homes that are ready to move into and at a good price.  However, there are also many that have significant condition issues that affect your ability to obtain mortgage financing.

  It used to be that conventional (non government) financing cured a host of ills when it came to condition when purchasing a home.  Conventional lending turned a blind eye to roofs that needed repair, structural issues, missing floor covering, drywall holes or broken windows.  Since the crash of 2008 that is no longer true.  Appraisers have been charged with the responsibility of noting serious condition issues in their appraisal reports and lenders require repairs to be made prior to closing -regardless of the type of loan the buyer is using to purchase the property.  So here's the rub.  If a property is bank owned it is up to bank whether or not they will repair the property to meet the requirements of the buyer's loan. Some will, but in many cases they won't-the home is being sold "as is".  And, to further complicate the problem-the bank that owns the property will not allow the buyer, even if able and willing, to make the repairs prior to closing.  Therefore it is important to know before spending money on inspections and appraisals-what repairs are appraiser going to cite as a requirement to close?  Here are a few  I can think of off the top of my head:

mold, termites or termite damage,missing or non functional heating and cooling systems, missing floor coverings (hardwood is fine but subfloor or concrete is not) missing kitchen cabinets, broken windows, absent plumbing, leaking plumbing, shingles that need to be replaced, peeling paint on properties built before 1978
 
  If the house you want to buy has any or more of these conditions present what do you do if the bank owner won't make repairs?  You can pay cash for the home-which is what many investors are doing, or take advantage of a rehabilitation loan such as the FHA 203K loan.  It is important to note that if you use a rehabilitation loan to purchase your home, your lender is going to require the repairs be made by a bonded contractor that has a business presence.  Uncle Bob who is good with woodworking  or your own sweat equity will not be allowed.   Why?  Because during the bad old days, the banks that allowed money for repairs that the home owner was doing themselves got stung, the money being used for purposes other than repairs to the home. The money for the rehabilitation loan is provided after closing but in a structured manner to the contractor under the watchful eye of the title company and the appraiser.

 If you are buying a HUD home, HUD has already appraised the property.  If it hasn't been on the property longer than 120 days you may be able to use the HUD appraisal with your loan. But in order to use it, your loan will have to be an FHA loan-which may not be the best financing available to you.  HUD may also allow you to borrow some money for repairs to the home and add it to your FHA loan. But those repairs have been pre-determined by the appraiser.


  Another important note to make with regard to repossessed homes is that on the lowest end of the market are homes that are selling for $20,000 to $35,000 or $40,000.  It is important to realize that mortgage lending in many cases can't loan money on purchase prices this low.  This would vary state by state depending on the predatory lending laws that are specific to each state.  In Indiana a lender can't charge more than 5% of the loan amount in fees and compensation. If it is a $30,000 property that we are considering, the lender can't charge more than $1500. If title fees are $650, the appraisal $425, credit report $45, that leaves the lender $380 to cover compensation, underwriting fees, administrative fees and processing.  So in the end, the lender is working in the red. And I think most people can understand that a company can't work at a loss.  When buyers ask me I typically tell them that I can't accept loans for less than $45K-50K depending on the type of loan and obtain a paycheck for myself and my company.  It is not a case of not wanting to process smaller loans, it is a case of the limitations place on lending by state law.

  So if your dream is to buy a $30,000 home and fix it up into it's true value of $100,000, and have a great low payment, you will have to have cash.  However, for homes a bit higher priced we may be able to help with the rehab loan.

  The last thing to consider when purchasing a repossessed home is real estate taxes.  In Indiana we are allowed exemptions or reductions in our assessed tax value. Two of the most common exemptions are the mortgage exemption of a $3000 reduction and the homestead exemption (given to owner occupied residences) of $48,000.  These reductions can make a huge difference in property taxes.  In Indiana we pay property taxes a year in arrears. What this means is that in 2013 we are paying 2012 taxes.  If the homeowner was foreclosed upon in 2012, the home will have lost the above two exemptions as no mortgage or owner/occupant live there. That means that the taxes on these homes will be significantly higher until the new owner/occupant files their own exemptions and the tax year catches up to the exemptions. So if you buy a repossessed home, you can anticipate that the taxes will be double or even triple what they will be 12 or 18 months down the road.

  The answer to should I buy a foreclosure depends on what you are willing to deal with as a buyer.  Many of these transactions take a long time to close because you are dealing with a bank and its attorneys as the seller, condition issues, and limitations on the type of mortgages available. However, if you can tough it out, you may be able to get yourself a whale of a deal on a home.