Trying Your Luck on a Foreclosure

Since foreclosures are very much a part of real estate business now across the US, buyers can’t be blamed for wanting to try their luck. The allure of an “easy bidding process” on a distressed property, the potential to “save thousands, if not hundreds of thousands, of dollars”… who wouldn’t be drawn in? But though ZipRealty agents have many successful distressed property sale transactions under their belts, they still have strong words of caution for buyers seeking to enter into this complicated realm. Today we hear from two Zip agents on their experiences, and their advice, on buying a foreclosure.


The Law of Attraction with Real Estate Foreclosures

Foreclosures aren’t easy buys, cautions Texas area Zip agent Brenda Reiss. If an REO property is attractive to you, you should assume it will be attractive to other buyers as well. Brenda says:

With these properties, clients often say things like "It's been on the market for 90 days.  We can wait to make an offer."   Or, "We can make a really low offer on this foreclosure...they would be lucky to get an offer."  Well, this is the point that the Law of Attraction rears its ugly head.  The minute you make the offer, it seems that all of a sudden there are multiple offers coming out of thin air.  This has repeatedly happened to me since 1988, when I purchased my first foreclosure property in Los Angeles.  6 months on the market and the minute I made my offer two other offers came in behind it-- and this was a really horrible time in real estate.

Things have not changed a bit.  A couple of weeks ago a client of mine was hesitating over making an offer on an REO that had been on the market 77 days.  It was over $300,000, in an area where average values are in the low to mid $200,000 range.  Yet I had a feeling we needed to make our offer quickly, and sure enough, we were faced with a multiple offer situation, proving the amount of days on the market did not factor in.

So how do you know when there might be multiple offers coming in? Brenda has a system:

1) I look at the competing inventory/square foot price in the area.

2) I look at how many business cards have been left at the home. 

3) I check out the nearest new home community that is closest in price and features, to see how much traffic is coming through the door.  I know it might sound like a lot of work but after seeing the traffic at that new home site, my client finally understood that time was of the essence. 

4) If I walk out the front door and there are realtors outside, eager to get inside, there most likely will be offers.  The Law of Attraction rules.

But What Do You Need to Know Before You Make that Offer?

Zip agent Michael Hickerson, who works out of Malibu/Conejo Valley, sums up the answer to this question with three points of advice:

1) There's always a reason this property did not sell at auction and ended up being owned by the bank. It may just be the bank asked too much relative to the loan on the property. Often it's an incurable defect like traffic noise, Fire Station two doors down, in the final flight path of the local airport, etc.  There are more arcane reasons too, like the place was used as a hospice and many patients passed away there. But it's always something.

2) The bank does not have the slightest attachment to the home and neither do their workers. While work performed may be of "acceptable workmanlike quality" you might find it less than acceptable.

3) Remaining repairs are seldom performed by the bank. You had better have a very accurate idea via professional inspection of what immediate expense you will be facing. As you know, when you buy a home the bank asks you to provide a list of your cash assets. They then go about assuring you will spend all of that in escrow.   Or in the case of our investment group, we simply did not do a basic drain test because the water was off. If we had bothered to get water to the property, we could have saved ourselves the trouble and major expense of digging up the floors and yard to install new lines. Of course, the major clue there was a problem here was that the usual gang of ten passed on bidding. (The gang of ten is basically ten groups of investors who buy at auction every day, and decide in advance who will bid on what, who gets which property, via a give and take developed over years). There is a group like this in every county in the country. If those guys step away from a property and let you have it without a fight, that's a major red flag.)

Want specifics on these potential red flags? Mike has some memorable ones.

Though he says it seems in his neck of the woods that banks are more proactive about repairs now (“The net net is that it actually reinforces property values”), buyers should do their due diligence with foreclosed properties with perhaps more diligence than is normally due.

“I had a personal experience with a home that was going into foreclosure- a nasty divorce and husband had not paid the mortgage for 2 1/2 years. When the wife got possession of the home, there was no equity left , but she had (way overspent) on a custom kitchen, so she took that with her after she canceled the listing, leaving an empty room where the kitchen used to be.”

Mike’s experiences are all the more relevant since he’s made the very mistakes he’s cautioning buyers against. He and a co-buyer once bought a foreclosure at an auction “without a comprehensive inspection and then discovered the previous owner had put cement in the house plumbing drain lines? We were professionals and tried to skip a very basic step.” (Read more on Michael’s blog)

Clearly, skipping the basic steps doesn’t pay off with REO properties.

Interested in Trying Your Luck?

With guidance, buying a foreclosure could be an incredible investment opportunity for the savvy buyer. But flying solo could be a lot more trouble than it’s worth. ZipRealty allows you to search for foreclosed properties and short sales in a city we serve, and allows you to review local Realtor profiles to find someone who you feel can help you navigate the deep waters of the distressed property market. In this and every case, it’s better to swim than to sink!