When people think of foreclosures they typically think of hitting the jackpot and getting a good buy, but is that really the case?  To answer that you first have to understand the process of how you buy a foreclosed property.  There are several types, but lets focus on the “Non-Judicial Foreclosure“. 

Non-Judicial Foreclosures: The foreclosing party must either be a condominium association, timeshare association or a mortgagee with a power of sale provision in the mortgage. The mortgagee or the association handles the duties of the commission including publishing notices of the auction, taking bids, and payment of the proceeds.

So you see in the newspaper that a house you are interested in is going to be auctioned off for sale at the court house “Flag Pole” and you want to buy it.  First things first, you want to make sure the home you are going to attempt to buy is all that you expect it to be.  So what needs to be done prior to going to bid on the home?

1. You need to know what the terms of the sale are? 

Typically, a 10% deposit of your maximum bid price is required in the form of a cashiers check at the time of the bidding.  The property is sold in “As-Is” condition and with a quitclaim deed, with no guarantees of any kind.  You, the buyer, pay all escrow and attorney fees to convey the property.  Most properties I have seen are sold without holding an “Open House”.  You typically have between 20-30 days to get the money together to complete the transaction.  If you don’t you lose your 10% down payment.  You also are responsible for removing any occupant from the property.

2. Since the ad in the newspaper only gives you a TMK number and address for the property, you will want to pull the TMK info on the property (county tax records). 

How big is the property? How many bedrooms, baths?  What is the zoning?  Is it in a floodzone? 

3. You will want to drive by the home and see what condition the home is in from an exterior visual drive-by look. 

What kind of neighbors are there?  Keep in mind you can’t go on the property, esp if the foreclosed owner is still living there, so you can’t do a home inspection, termite inspection, have a survey performed. You really have to expect the worst.  Is their termite damage,? Does the roof leak? How is the foundation? How is the electrical? Are the kitchen cabinets still there? (You may laugh but when someone loses their home, they typically trash the place and leave with whatever they can, so even if the cabinets were there when you peaked in the window, they may not be when you buy the home) You don’t know.

4. Since the home is being sold via a Quitclaim Deed with no warranties or guarantees, you will need to purchase a preliminary title report for between $200-300 to make sure the title will be clear, and that their aren’t any problems or surprises when the title passes. 

The preliminary title report will show any liens, encumbrances, etc and will show what the CC&R’s are. Is there a recorded encroachment agreement or Party Wall Agreement? What are the CC&R’s? If there is an association, you would need to purchase Association Documents ($350-500).  What is the status of the association? Are there any up coming assessments or current assessments? Are their restrictions on use?

5. With a home you will want to buy a building permit packet. 

This runs about $40 per permit.  You would have a minimum of plumbing, electrical, and general building.  The county tax records are often wrong, so a building permit packet is very important to know how big the home exactly.  This will not tell you if an addition or an enclosure was done, adding to the square footage.  You may say that it is a bonus if there was an unpermitted area because it would give you more home, but if you get a loan, you better hope the lender doesn’t have a problem with it and only excludes the unpermitted area from the value of the property.

6. Now that you have most of your information together, you need to determine the value of the home in it’s estimated condition and what repairs might need to be done and their cost.

At this point you are either working with a Realtor to help you determine the value or you are accessing the information of comparable solds from the county records.

7. Once you have determined the value of the home and added in your costs for repairs you will need to decide how much you are willing to pay for the home.

This will be your risk/reward value.  Since you don’t know the exact condition of the home due to not being able to inspect it, I would assume you want to buy the home at a price, that if you did the estimated repairs, the value would still be under market value.  

8. Now you have to make sure you get your money together to be able to buy the property should you become the winning bidder.

Can you even get a loan on the home and if so do you qualify.  If so, can you close within the specified time-frame as stated in the foreclosure terms.  My questions, which I don’t have an answer for yet, is, “Will a lender give you a loan on the property where a quitclaim deed is being used or do they require a Warranty Deed?” (A quitclaim deed doesn’t guaranty that the propertytitle is clear.  Is the lender willing to take that kind of risk?  Can the appraiser get into the property to do an appraisal?  If you can’t come up with the money to close on time you will lose the deposit (10%) and are their any penalties? You may need to come up with cash to buy the home.

 9. Now, with everything in line, you bid on the property.

You have spent potentially up to $1,000 for the necessary info to limit the risk of a problem and you haven’t even become the winning bidder yet.  If you get to your maximum bid and someone outbids you, you will walk away from $1,000.  If the home is in a good area of town, the home will be a desirable property and most likely have multiple bidders.  By the way….most foreclosure homes sell for 5% below market value.  Is that enough of a deal to offset the risks?

My valuation for a max condo price bid taking into consideration the unknown repair risks (assuming the worst) came out to around a 80% market value.  In other words, I would have to buy the unit at roughly 80% of what the market value was, and after I spent the money on the worst case scenario repairs, it would be worth market value. 

That seems like a pretty risky investment.   In a market with stable real estate prices, and a stable economy it doesn’t appear worth it.  In a market where the economy is depressed and property prices are decreasing, such as in Michigan, it may make more since, but you always have the added risk.  Right now in Hawaii, I have gone to several foreclosures, and the banks have set a minimum bid price that no one has wanted to meet or beat.  This tells me the lenders aren’t ready to give the properties away because the market is healthy enough to put it on the market as an REO and they will be able to re-coop their money.  Here is Hawaii’s Foreclosure Report.

Any thoughts? 

I should have more data for you later.