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As an industry professional, I enjoy watching HGTV shows-such as Flip or Flop, Property Brothers and Rehab Addict. (I have entered the HGTV contest to win the smart house in Nashville multiple times...well, daily...ok...in the interests of full disclosure as many times a day as they will allow.) In all those programs, the buyer or star of the show purchases run down homes, gives them a fabulous makeover and ends up with a beautiful home worth two times as much as they paid for it. I often wonder if television programs like these influence buyers to dream about their own version of these shows-buying cheap and harvesting the equity from a repaired and restored home.
And it is a fact that bank owned properties or HUD owned properties often sell well below market value-largely due to their condition. If you are considering purchasing a bank owned property let me list some facts in order to take the fantasy out of the equation.
1) The foreclosure process takes time-6 months to a year. Typically the original home owner will have vacated the home long before the sheriff's sale returns the home to the bank. In the meantime the home has been sitting empty-or perhaps has even been occupied by squatters. In many cases the copper from the plumbing has been stripped, air conditioning units stolen, and perhaps the property has even been vandalized.
2) Banks aren't in the housing maintenance business. Depending on the condition of the property when the bank takes possession, the bank may or may not make some repairs. This is why you often see the properties sold "As Is".
3) Being vacant is hard on a house-seals on the plumbing dry out, if the property hasn't been properly winterized pipes may burst, leaks grow mold.
4) The bank that owns the property really isn't interested in making repairs in order to sell it-
www.kiji9ji.caWhich means the repairs will fall on you. So the first question is-
1) How will you get the money to make repairs? Do you have cash reserves?
While there are a couple of rehab loans available-often the rules and controls on those loans don't appeal to buyers-not much sweat equity is allowed-nor can your Uncle I Fix It on Weekends do the work. Those loans can solve the problem -but the property has to fit within certain parameters and often it doesn't.
2) Most bank loans won't allow you to close on a property if certain condition issues aren't present. For instance, I can't tell you then number of borrowers I have met with that are frustrated because the home they want to buy is built on a slab and somewhere along the way, someone removed all the carpeting. Crazy as it sounds, lenders will not loan on a property that has bare concrete or subfloor showing. Well fine you say, I will run out to the Home Depot and have them install carpeting. Then we can close. Except, the bank that owns the house won't allow the work to be done to make the house acceptable to the bank that is loaning the money (might even be the same bank). In bank owned properties borrowers aren't allowed to make repairs prior to closing even if they are willing to pay for it themselves.
How the heck are you supposed to buy that house? Unless you are using one of the FHA rehab products or a Fannie Mae rehab product, the only answer is cash.
Got any of that lying around? Unless you are an investor or make your business flipping homes, chances are, you don't.
HUD does give preference to owner occupants when the foreclosed homes they have taken into inventory go up for sale. HUD uses a bidding process and owner occupants get first crack in the bidding process. In most cases HUD will have assessed the property prior to putting them on the market for condition and also had them appraised. In some cases the buyer can even use the HUD appraisal rather than ordering a new one for their own loan. If the home is assessed as up to FHA condition standards, generally speaking there should be no problem obtaining financing (though in order to use the appraisal generated by HUD the loan must be an FHA loan.) If on the other hand, repairs need to be made, and there is mold, lead based paint present in the home, or termite damage-then one of the three FHA rehab loans will be required to repair and buy the property if the buyer can't pay cash. HUD also will not allow a buyer to repair a home prior to closing.
For small repairs, up to $5000, Hud sometimes allows a repair escrow that can be added into the borrower's normal FHA mortgage.
On specific properties HUD also allows a down payment of $100.
In any case, there is a huge amount of bureaucracy in the purchase of a bank owned property. HUD has specific methods and procedures in the purchase of the homes in their inventory. Many banks rely on a stable of attorneys to negotiate and make decisions as to the disposition of their homes. Let me tell you something-attorneys can take a long time to get back to you-hope you aren't in a hurry to close. HUD is a bit more timely but they have a specific process and they don't deviate or make exceptions.
I don't want to discourage anyone from considering the purchase of a foreclosure. What I would say be sure you know what you are buying. Have the home thoroughly inspected (which can also be a problem as most likely the foreclosure you are looking at will not have the utilities on and in order to do a thorough inspection utilities need to be on-one more item that most likely will be on the buyer's dime.)
In Indiana there are also tax implications.There are big discounts on taxable value based upon living in a home-a foreclosed property will have as much as triple the tax liability as a home that is currently owner occupied. What this means is that the first year you own your previously foreclosed property you will be paying taxes that were assessed while the home was non owner occupied-or bank owned. It will be the second year you own the home that your discounts or exemptions kick in and lower the taxes on the property. So while you may get a great buy overall-you will pay more for while. Long term you probably will do just fine.
Be patient -if you have to be out of your current living situation in a month or even three months a foreclosed property may not be for you. There is no guarantee that the sale will conclude on schedule-there are too many layers of bureaucracy and too many hoops to jump through. So be sure you have a Plan B for housing if the transaction goes on too long. And plan to spend a long time waiting for answers.
icanhaz.cheezburger.com
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