Is it safe to buy a foreclosure? I will separate the question into two parts: buying an REO foreclosure vs. buying a foreclosure auction. I will leave “short sales” out of this discussion, that happens prior to the foreclosure.
Let’s start with the latter, buying a foreclosure at auction. This is the way to get the best deal, but is also, by far, the most risky. This is what the TV shows about real estate flipping are based on. Even the guys that do this all the time for a living almost always run into problems with property condition, unknown zoning and permitted use issues, and serious cost overruns. These aren’t even the scary part of what can go wrong!
Besides having to buy the property “as-is”, with possible no chance to see inside the property, there can be serious and costly issues with title and liens on the property. Many investors have bought what they think is a steal on a property only to later find out they bought a second lien or mortgage, and that a considerable amount of money is still owed on the property. Unless you do this all of the time, and know what you are doing, you can make a mistake that could wipe you out financially.
The other method of buying foreclosures, like the ones you see for sale on my web site, involves properties have been bought back by the bank”. These are called “real estate owned” foreclosures, or REO property. This also includes Fannie Mae and Freddie Mac foreclosures. The buyer can perform a property inspection, and if pre-approved, apply for a loan with time to complete the loan and close.
This is the safest way to buy, and because of that, it has the most competition. The REO buyer needs to have a pre-approval letter to even write an offer, so that should be the first step. If the buyer is not getting a loan, they will need proof of funds from their bank. The buyer needs to be able to preview the property as soon as possible, and get an offer in writing very quickly. The time to inspect the property is after the offer has been accepted, not while a dozen other buyers are looking at the property the same weekend.
Sounds pretty scary, huh? It shouldn’t be, if you are prepared and have an experienced agent that sells many foreclosures, like John Garrett. I can provide you with references from my last 5 foreclosure clients, it is available upon request. Just call me at 573-480-6420 for a friendly chat about this or any real estate subject.