Nearly six million homes were foreclosed after the real estate market collapsed in 2008-09. Foreclosed homes were abundant just a few years ago, but the tide has since shifted. Today, foreclosures today are down more than 2/3rds from 2010 peak levels. The National Association of Realtors recently noted that only about 7% of home that sold in late 2015 were foreclosures.
Bargains were everywhere when foreclosures flooded the market, but great buys are more difficult to find now and require thorough due diligence by the buyer. When evaluating a foreclosure opportunity today, rehabbers must carefully evaluate the property’s location, condition and price.
A Good Neighborhood is Key
A good neighborhood supports rising home prices and attracts buyers. The best neighborhoods are characterized by well-maintained yards and home exteriors, short drive times to shopping and work, and good school districts with competitive test scores. Rehabbers should be wary of neighborhoods where there are many foreclosed homes since vacant houses may drive down property values.
Personally inspecting the neighborhood and the property is highly recommended since listing agents specializing in foreclosures may have 20 or more properties listed and little time to focus on individual properties. Key selling points like new landscaping may be overlooked by the agent and not noted in the online listing.
Assess the Condition of the Home
A thorough inspection of the foreclosed property is essential, particularly if the house has been sitting vacant for many months. This is especially true for bank-owned properties, which rarely come with seller disclosures. For most of these homes, necessary maintenance has been postponed for years. In addition, utility services may have been shut off years ago. Interior temperature swings caused by the lack of heating or cooling may lead to damaged drywall. Plumbing problems can develop from lack of use. Vacant homes are also often targets for thieves so rehabbers should carefully inspect water lines, air conditioning units and furnaces for missing parts. A home inspection is a good starting point, but most inspections can’t detect mold inside a wall, foundation damage or bad plumbing so rehabbers should proceed with caution.
Rehabbers who purchase a house requiring extensive work will need cash and know-how to get the repairs done right. Problems uncovered during the home inspection can be bargaining chips for negotiating a price, but not every bank will agree to price concessions or make required repairs. If you are looking at a fixer-upper, at bare minimum your due diligence should include a review of comparable market sales and contractor estimates for repairs. This information should be factored into your offer. For example, if similar properties are selling for $200,000 and the foreclosed property needs $20,000 of repairs, an offer of $180,000 is too high.
Lowest Price Isn’t Always the Best Deal
Pricing requires an understanding of the different types of foreclosures. Foreclosure auctions, where buyers bid without seeing inside the property, often have the lowest prices and the highest risk. This is because repair costs are extremely difficult to estimate for these properties. In addition, liens, code violations and other issues may be found later that make it difficult to gain a clear title.
A more common type of foreclosure is repossession by the lender. This happens after a property hasn’t secured the required minimum bid at auction. Bank repossessions, also known as REO (real estate owned) properties, tend to fetch higher prices, but are also safer since the lender is obligated to clear all liens on the property, including back-taxes. The lender’s agent also typically cleans up the property for sale.
Banks often hire asset management companies to price foreclosed homes and handle the actual sales. The asset management company will be given guidelines for the acceptable deduction from list price.
Generally banks want to move distressed assets off their books as quickly as possible and price the property at or slightly below market value. This leaves some negotiating room for the buyer. However, just because the bank loses money when the house sits empty doesn’t mean that it will accept a lowball offer. Some banks will wait for a housing market rebound rather than accept a big loss on the investment. Many banks will not negotiate a lower price at all in the first 60 days of the listing.
Experienced rehabbers know the lowest-priced property on the block isn’t always the best deal since these houses often require extensive repairs or are in neighborhoods with many vacant houses. Sometimes a better deal can be made by making a low bid on an overpriced property that has been sitting on the market for a while. A lack of interested buyers may make the bank more amenable to negotiating the price. Veteran house flippers recommend waiting until the end of the month or quarter to make your offer since banks interested in cleaning up their balance sheets have the most incentive to close deals at these times.
Where to Look for Foreclosed Houses
A simple Google search for “auction homes” or “foreclosures” can generate many leads. Another option is to contact a real estate agent specializing in foreclosures. These agents network with dozens of traditional lenders, mortgage banks and other real estate agents and often have the best access to available listings. VA and FHA foreclosure sales and legal notices of default are published in newspapers. Online public records at the county courthouse are another good source for leads. Some of the best leads come from driving around a neighborhood looking for foreclosure notices. These notices are posted on properties weeks before the foreclosure notice in the local newspaper appears.