How To Buy A Foreclosed Home

photo by Taber Andrew Bain

US News & World Report quoted me in  How to Buy a Foreclosed Home. It opens,

As home prices soar in many cities, buyers might look to foreclosures as an affordable option for landing their dream home. Typically, a foreclosure occurs when a homeowner no longer can make the mortgage payments and the lender seizes the property. The lender then requires the former owner to vacate the property before offering it for sale, usually at a discounted price. In some cases, the home is auctioned off to the highest bidder.

Foreclosures offer home shoppers the potential to score a great deal, says Elizabeth Mendenhall, a Realtor in Columbia, Missouri, who is president of the National Association of Realtors.

“Sometimes people think a foreclosure only happens to the lower end of the market, but you can definitely find foreclosures at any price range,” she says.

But while buying a foreclosure can save you a lot of cash, it does come with risks. If you pursue a foreclosure, it helps to have a “stomach of steel,” says David Reiss, law professor and academic programs director of the Center for Urban Business Entrepreneurship at Brooklyn Law School.
“There’s going to be a lot more ups and downs” than in a typical homebuying process, says Reiss, whose work focuses on real estate finance and community development.

Why Buy a Foreclosure?

In recent years, foreclosure sales have been trending downward, according to national property data curating company Attom Data Solutions. That is largely because a strengthening U.S. economy has reduced the number of borrowers who lose their homes as a result of failing to pay the mortgage. In 2017, distressed home sales – including foreclosures and short sales – made up 14 percent of all U.S. single family home and condo sales, according to Attom Data Solutions. That number was down from 15.5 percent in 2016 and a recent high of 38.6 percent in 2011.

Still, some buyers look to foreclosures to get the best possible deal. Homes may be for sale in various states of foreclosure. For example, pre-foreclosure is a period when the owner has fallen behind on payments, but the lender has not actually taken the home from the owner. Homes sold at this point often go through the short sale process, where the lender agrees to accept an amount of money from the buyer that is less than what the current owner owes on the mortgage.

Properties that are already in foreclosure are sold at an online or offline auction, or by a real estate agent. The biggest lure of buying a foreclosure is the potential savings you get compared with buying a similar nondistressed property.

“It can be like a 15 percent discount on your neighboring houses,” Reiss says. “So, it can be significant.”

But Mendenhall says how much you will save depends on the local real estate market and the stage of foreclosure of the property.

The Risks of Buying a Foreclosure

Purchasing a foreclosure involves several substantial risks, so buyers must enter the process with their eyes wide open. In many cases, if you buy a foreclosure at auction, you must purchase the property sight unseen. Reiss says this is the biggest potential danger of buying a foreclosure.

“The big, scary thing is that with a number of foreclosures, you can’t actually inspect the property before you actually bid,” he says. “That’s in part why the prices are below the market.”

Even if you can get a professional inspection on a foreclosure, you typically have to buy the house “as is.” Once you purchase the home, any problems that pop up are yours – as is the responsibility for finding and paying for a remedy. Such problems are more likely in a foreclosure than in a nondistressed property. For example, in some cases, a frustrated family might strip the home of valuable elements before vacating the house.

“Or they kind of just beat it up because they were angry about having to go through the foreclosure,” Reiss says.

The mere fact that the home is vacant also can lead to problems. Reiss says a home is like a plant – if you don’t tend to it regularly, it can wither and die. “If you happen to leave it alone on its own for too long, water leaks in, pipes can burst, rodents can get in, just the elements can do damage,” he says.

Mendenhall adds that people who lose their homes to foreclosure typically have major financial troubles. That can trigger other troubles for the new owner. “If the previous owner was in financial distress, there’s a chance that there’s more maintenance and work maybe that they haven’t completed,” she says.

Reducing the Dangers of Buying a Foreclosure

There are a few things you can do to mitigate the risks associated with buying a foreclosure. For starters, see if you can get a professional inspection of the property. Although buyers often cannot inspect a foreclosure property, that is not always the case. So, be sure to ask a real estate agent or the seller about hiring a home inspector.

“Even though it may extend the process, if you can have a qualified inspector come in, you can know a little bit more about what you’re getting into,” Mendenhall says.

If you can’t inspect the property, Reiss recommends researching its history. Look at publicly available records to find out when the property was last sold and how long the current owner had possession. Also, check whether building permits were drawn and what type of work was done. “Maybe you’ll see some good news, like a boiler was replaced two years ago,” Reiss says. “Or maybe you’ll see some scary news, like there’s all these permits and you don’t know if the work was completed.”

Also, visit the house and perform a “curbside inspection” of your own, Reiss says. “Even if you can’t go inside the house, you want to look at the property,” he says. “If you can peek in the windows, you probably want to peek in the windows.”

Knock on the doors of nearby neighbors. Tell them you want to bid on the property but need to learn all that you can about the previous owners, including how long they lived in the home and whether they took care of it. And ask if there have been any signs of squatters or recent break-ins.

“Try to get all that information,” Reiss says. “Neighbors are probably going to have a good sense of a lot of that, and I think that kind of informal due diligence can be helpful.”

Working with a real estate agent experienced in selling distressed property may help you avoid some of the potential pitfalls of buying foreclosures, Mendenhall says. Some agents have earned the National Association of Realtors’ Short Sales and Foreclosure Resource Certification, or SFR. Such Realtors can help guide you through processes unique to purchasing distressed properties, Mendenhall says.

How to Find a Foreclosure

You can find foreclosures by searching the listings at bank websites, including those of giants such as Wells Fargo and Bank of America. The government-sponsored companies Fannie Mae and Freddie Mac also have listings on their websites.

The federal government’s Department of Housing and Urban Development owns and sells foreclosed homes. You can find listings on the website.

Private companies such as RealtyTrac offer foreclosure listings online, typically for a fee. Finally, you can contact a real estate agent who will find foreclosures for you. These agents may help you find foreclosures before others snatch them up.

Is a Foreclosure Right for You?

Before you pursue a foreclosure, Reiss encourages you to ask yourself whether you are in a good position to take on the risk – and, hopefully, to reap the reward – of buying a foreclosure. It is possible to use conventional financing, or even a loan from the Federal Housing Administration or Department of Veterans Affairs, to buy a foreclosure. However, people with deeper pockets are often better candidates for buying a foreclosure.

Because the process can be highly competitive, buyers with access to large amounts of cash can swoop in and land the best deals. “You can get financing, but you need to get it quickly,” Reiss says. “I think a lot of people who go into purchasing foreclosure(s) want to have the cash to just kind of act.”

Sellers of distressed properties love cash-only buyers, because the home can be sold without a lender requiring either a home appraisal or a home inspection. “So, the more cash you have on hand, the more likely you’re playing in those sandboxes,” Reiss says.

In addition, buyers of foreclosures often need to spend money to bring a property up to code or to make it competitive with other homes in the neighborhood. “Have a big cushion in case the building is in much worse condition than you expected,” Reiss says.

He cites the example of someone who buys a foreclosure, only to discover that the piping has been stripped out of the basement and will cost $10,000 to repair and replace. “You need to know that you can handle that one way or the other,” Reiss says.

People with solid home maintenance and repair skills also are good candidates for buying a foreclosure. “I think if you’re a handy person, you might be able to address a lot of the issues yourself,” Reiss says. He describes such buyers as anyone who has “a can-do attitude and is looking to trade sweat equity for home equity.”

Reiss and Mendenhall agree that flexibility is crucial to successfully shopping for and purchasing a foreclosure. Mendenhall notes that a foreclosure sale can take a long time to complete. “It can be a long process, or a frustrating one,” she says. “It can depend upon where they are in the foreclosure process. It can take a much longer time to go from contract to close.”

For that reason, a foreclosure might not make sense for buyers who need to move into a property quickly, she says. Also, think hard about how you really feel about buying a house that needs extensive renovation work that might take a long time to complete.

“It can be hard for some people to live in a property and do repairs at the same time,” Mendenhall says.

Cracked Foundation for American Households

photo by shaireproductions.com

President Trump’s budget claims to lay A New Foundation for American Greatness. Whatever else it does, when it comes to housing it leads down a path to ruin for many an American family.

Here is just some of what he proposes: cutting housing choice vouchers by almost $1 billion; cutting support for public housing by nearly $2 billion; and getting rid of the entire $3 billion budget for Community Development Block Grants (CDBG). These are all abstract numbers, so it is worth breaking them down to a more human scale.

Vouchers.  Housing choice vouchers help low-income families afford a home. Republicans and Democrats have long supported these vouchers because they help tenants afford apartments that are rented by private landlords, not by public housing agencies. Vouchers are effectively an income subsidy for the poor that must be used for housing alone. The landlord is paid the subsidy and the tenant pays the difference between the subsidy and the rent. These vouchers are administered by local public housing agencies.

Nearly half of vouchers go to families with children, nearly a quarter go to the elderly and another fifth go to disabled adults. The nonpartisan Center on Budget and Policy Priorities has found that voucher dramatically reduce homelessness. It also found that voucher holders were likely to be in the workforce unless they were elderly or disabled. While vouchers are a very effective subsidy, the federal budget has only provided enough funds for about a quarter of eligible households. Trump’s proposed cuts would cut funding for more than 100,000 families. That’s 100,000 families that may end up homeless as a result.

Public Housing. Public housing has been starved of resources for nearly forty years. While some believe that public housing has been a failure overall, it remains a vital source of housing for the very poor. Trump’s proposed cuts to public housing operating and capital expenses means that these tenants will see their already poorly maintained homes descend deeper into decrepitude. Unaddressed leaks lead to mold; deferred maintenance on boilers leads to no heat in the winter – every building needs some capital repairs to maintain a baseline of habitability.

We must ask ourselves how bad will we allow this housing stock to get before we are overcome by a sense of collective shame. If a private landlord provided housing that was as poorly maintained as much of the public housing stock, it would be on a worst landlords list in local newspapers. The fact that the landlord is the government does not redeem the sin.

CDBG. The Community Development Block Grant funds affordable housing and anti-poverty programs along with community development activities engaged in by local governments. CDBG has broad support from Republicans and Democrats because it provides funds that allow local governments to respond more nimbly to local conditions. Local governments use these funds for basic infrastructure like water and sewer lines, affordable housing and the soft costs involved in planning for their future.

While these expenditures are somewhat abstract, recent press stories have highlighted that CDBG also funds Meals on Wheels for the elderly. While this is not a big portion of the CDBG budget, it does make concrete how those $3 billion are being allocated each year by local communities seeking to help their neediest residents.

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Trump’s budget proposal is honest in that it admits to making “substantial changes to the policies and spending priorities of the previous administration . . .” Members of Congress from both parties will now have to weigh in on those substantial changes. Are they prepared to make Trump’s cuts to these housing and community development programs that provide direct aid to their neighbors and local governments? Are they prepared for the increase in homeless that will follow? In the increase in deficits for state and local governments? If not, they should reject President Trump’s spending priorities and focus on budget priorities that support human dignity and compassion as well as a commitment to local responses to address local problems.