5 Pitfalls to Avoid When Buying a Foreclosure

By Brendon DeSimone

These are trying times for many homeowners. Walk away from a mortgage? Something that was unthinkable and morally offensive 10 years ago is now an option many people are choosing. Home foreclosed? Some people who've lost their homes to the bank are stripping the property bare, hoping to sell the appliances to recoup at least some money.

As you might expect, buying a foreclosed home comes with opportunities -- and certain challenges. Here are five potential landmines to look out for when buying a foreclosed property.

1. The process is highly impersonal.

With a foreclosure, you're not buying the house directly from the person who lived there. You're buying it from the bank that foreclosed on the previous owner. And in the bank's mind, the property is simply an asset that it needs to get off its books. The bank doesn't see it as a place to live or where someone raised a family or even where you'll potentially raise a family and make memories.

Because you're dealing with a bank, not an individual homeowner, be prepared to wait for a few days, if not weeks, for a response. Don't think about writing a cute note or introducing yourself directly or through your real estate agent. For the most part, the bank's agent doesn't even show the contract, the pre-approval letter, or any of the offer pieces to the bank. Instead, the bank's agent inputs the data into a website or piece of software. The asset manager -- the bank's seller of the property, in other words -- simply sees the bottom line number. For the bank, it's just a numbers game. Are you getting the sense that this will be a highly impersonal process?

2. Don't expect disclosures.

REO stands for "real estate owned." An REO property is one owned by a bank after going through the foreclosure process.

In an REO sale, there aren't any disclosures. You won't have any knowledge of the previous seller's experience. If there's not a seller on hand to answer questions about the home and the neighborhood, you're going into the foreclosure sale blindly. So it's important to do the most due diligence possible. This may require going to the city's building department to check past permits and records and to double- and triple-check the preliminary title report.

Bottom line: Work with your buyer's agent to learn as much as possible about the home and the neighborhood. If the property sold in the past five years, your agent may be able to obtain past disclosures.

3. Prepare to see homes stripped bare.

A multimillion-dollar home was once foreclosed on in San Francisco's Castro neighborhood. Before the seller left, he removed every appliance and expensive light fixture as well as the majority of faucets.

Some homeowners may have struggled to keep the property or even attempted to sell it as a short sale, but the bank wouldn't cooperate. The homeowner may have hard feelings toward the bank and therefore might have felt justified damaging the property before leaving. Ultimately, this will hurt the home's value. You, as the buyer, will be responsible for any fixes. And you should account for any missing fixtures and features in your offer.

4. Don't expect the bank to give you credits or fix things.

Your offer and the likely discounted list price (discounted from similar comps nearby) should already account for the risk you're taking on an "as is" property. There won't be a disclosure about a leaky window, or the broken water heater from last year, or the outlet in the kitchen that's not working correctly.

As a buyer, your contract will allow you to have an inspection, so get the biggest and best inspection you can possibly have. (And hope that you don't have one of these inspection nightmares on your hands.) If you can get your hands on an old inspection report, review that prior to making your offer.

For example, prior to a home going into foreclosure, the seller had a buyer lined up. The home was to be sold in a short sale. The inspections came up with too many issues, and the buyer walked away. Through the real estate community, the agent representing a potential buyer of the property after it had been foreclosed upon got her hands on the old inspection report. She gave the report to her client, saving him a lot of time and money.

5. The bank will have its own processes.

The bank usually won't use the local contract from the board of Realtors. Nor will the bank follow any of the norms, processes or mores that are standard in the local real estate community. Instead, the bank will have its own contract that protects its interests. This contract will be followed by dozens of pages protecting the bank from future lawsuits, referring to the sale as "as-is" and putting nearly all the burden on you, the buyer. The bank won't allow the property to transfer unless it is done this way. In some states, if the bank requires the buyer to use a particular title company, then the bank would be required to pay the buyer's premium on the title insurance. This could translate into huge savings for the buyer.

To sum up: There are many tempting deals out there among foreclosed homes. You should absolutely consider them -- but make sure you're not getting less than you bargained for.

See more at Zillow:
How Much House Can You Get for $350,000?
How to Keep Your Tenants Happy
How Will Fracking Affect Your Home?

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How to Find Foreclosure Listings
How to Find Foreclosure Listings