By Tara-Nicholle Nelson | Broker in San Francisco, CA

4 Tricks and Traps Foreclosure Buyers Need

to Know
3
Posted under: Market Conditions, Home Buying, Foreclosure  |  January 11, 2011 4:23 PM  | 
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Interest in buying a foreclosed home is on the rise, but so are concerns about the risk involved
in the process. In a December survey, Trulia found that 49 percent of Americans were at least
somewhat likely to consider buying a foreclosure, up from 45 percent in May 2010.  But the
number of US adults who believed there are disadvantages to buying foreclosures had also
increased, from 78 percent to 81 percent over the same time frame.  Among those folks who
had qualms about purchasing a foreclosure, the top concerns were:

 that buying a foreclosure might involve hidden costs,

 that the buying process itself is risky, and
 that the home might continue to lose value, after escrow closes.

While there certainly are risks that run with buying a foreclosed home, the most risky way to do
it is also the least common method: at the foreclosure auction itself. Auction buyers often don't
have the opportunity to fully vet the foreclosure to ensure that they are receiving clear title
and/or to make sure they're not getting a lemon. With that said, most foreclosures are resold not
at the foreclosure auction, but as an REO (short for Real Estate Owned - by the bank), listed by
a real estate broker on the Multiple Listing Service and on Trulia!

When you buy an REO in this way, you have lots of opportunities to use some tricks of the
trade, so to speak, to avoid some of the traps you may fear. Here are my Top 4 Tricks and
Traps for Foreclosure Buyers:

1.  As-is means as-is, period.  (Most of the time.) Banks have very little interest, inclination or
even the logistically necessary resources to execute repairs on your home. Many of these
homes are managed by an asset management company in another state, and may not even
have a local person besides the agent who can handle large repairs. Generally speaking, bank-
owned homes are sold on a very strict "as-is, where-is" basis, which just means that you should
expect to take possession of it, if you buy it, in exactly the position and location it is, no matter
how defective.  Do not walk into a viewing of a foreclosed home, notice how the plumbing is all
ripped out of the wall, and make an offer for it, assuming you'll be able to get the bank to "fix"
the issue later.  Usually, if the bank is willing to do any repairs to a foreclosed home, they do so,
on the advice of the listing agent, prior to the home being listed.

Out of hundreds of foreclosure transactions I have personally been involved in, I have seen
exactly four where the bank did agree to do some level of repairs at a buyer's request.  Every
one of those times, the repair was to fix a health-and-safety endangering property defect, like a
gas-leak or an electrical fritz. And every one of those times, the property defect was highly non-
obvious - not something even a diligent buyer could have detected visually prior to making an
offer.  Maybe another few times I've seen a bank agree to a small price reduction due to
surprising condition problems.  And dozens of times, I've seen transactions fall apart or buyers
take on the property’s repair costs, when they request repair credits, price reductions or actual
repairs from the ban seller.

If a foreclosure you're considering has obvious property damage, have your contractor stop by
with you or gather whatever information you need to get as comfortable as possible with your
offer price, assuming that the bank will not be chipping anything in for repairs, before you make
the offer.

2.  The bank speaks no evil.  When it comes to real estate disclosures, the fact is, the bank
speaks not much of anything!  Many states exempt banks and other types of corporate
homeowners from making substantive disclosures about the condition of the property.  Even in
jurisdictions where the bank is not legally exempt, most banks will simply write across the
required disclosures something to the effect that the bank has no knowledge of the property's
condition.  (Before you protest with a "that's not fair!!" keep in mind that the bank never lived in
the property, so most often truly does have no idea of any important facts or details about its
condition or location, the things an average home seller would be required to disclose.)

Even in a normal transaction, it behooves a buyer to be thorough in having the property

inspected and meticulous about reviewing the resulting inspection reports.  But buying a
foreclosure ups even that ante, as you have no seller disclosures to highlight particular
problems you should have looked at, and none of the usual legal recourse you would have if a
“regular” seller made incomplete disclosures.  Get a property inspection.  A pest inspection.  A
roof inspection.  A sewer line inspection. A pool inspection, if you have a pool and care about its
condition.

Yes - all these inspections cost money, but the drama and thousands each of them can save
you is well worth it. And read your state’s buyer inspection advisory or similar document (ask
your agent), just to make sure you’re aware of all the inspections that are available to you, and
work with your agent to determine which ones make sense, and which are not appropriate.

Some insider tips:

 Vacant foreclosures often have their utilities disconnected.  Work with your agent to
make sure the utilities get turned on - even for a single day - so that your property
inspector can run the water taps, test the stove and dishwasher, see if the water heater
and electrical outlets work, and so forth.
 If appliances are there, the bank will probably leave them there, even though they may
not have technical “legal” ownership of them, so they may not be included in the
contract, like in a "normal" home sale.
  However, the bank will not give you any sort of warranty on appliances, so try to obtain
any warranty coverage you want or need elsewhere - from a home warranty company
or, potentially, the original manufacturer/retailer.

3.  The contract terms, they are a changin'. One thing squarely in the wheelhouses of local
real estate pros are local market standard practices.  From negotiating practices to which party
pays which closing costs, every market is different, and experienced local agents are experts on
this information.  If you’re buying a foreclosure, though, the bank will often require you to use it’s
own purchase contract, rather than the more commonly used state forms.  Many times, this is
done to advise the buyer of the bank’s refusal to make substantive disclosures (see above) and
to change some of the normal practices for your area to the bank’s standard practices. 

For instance, if you are buying a home in a contingency state, where you would usually have to
sign a document proactively releasing contingencies, the bank’s contract will probably change
that, so that your transaction operates on an objection period. In "objection" based transactions,
you  have a certain period of time in which you must either speak up about your concerns with
the property and/or cancel the deal, or you will automatically be presumed to be moving forward
with the deal and your deposit money will be forfeited if you change your mind after that date. 

If you’ve been making offers on non-foreclosures on the standard contract form, or you’ve
bought homes before and think you know the drill, please - I implore you - READ every word of
the contract you sign when you buy a home from the bank, and ask your broker, agent or
attorney to explain anything that doesn’t make sense.

4.  Expect the unexpected.  When you buy a foreclosure, you might end up working with the
bank’s escrow company, instead of a company you or your agent selects.  And the bank's
escrow provider might be slow or disorganized.  C’est la vie. The bank might rush you for your
deposit money, but take their own sweet time coming up with the necessary signatures on their
end to close the deal.  Par for the course.  You might expect that the bank would be desperate
for buyers, and instead find out that there are 20 offers on the same REO.  Or, you might be the
only offer and still get your aggressively low (but still reasonable) offer rejected, only to have the
bank reduce the list price of the home to the same price of your offer!  (They often want to see if
exposing it to other buyers at the new, lower list price might generate more interest and higher
offers.)  

When you’re buying a foreclosure, expect glitches, expect your calendar to be derailed, expect
the bank to be inflexible and possibly even unreasonable.  It’s not overkill to ask your broker or
agent to brief you on the common complications they see in REO transactions.  Having realistic
expectations may keep you from pulling your hair out.  And if the transaction turns out to run
smooth as silk?  You’ll be pleasantly surprised.