Since I began working with foreclosed properties a couple years ago, I’ve come across several myths that buyers and investors tend to believe. Hopefully this article will put five of the most common myths to rest and educate you about buying foreclosures.
1. The amount paid at the Sheriff’s sale matters. A Sheriff’s Sale is a public auction of real property which takes place at the end of the foreclosure process. When payments have not been made, the lender files suit in Superior Court to terminate the property owner’s rights of possession so that the lender may sell the property to recover its loss. If the lender prevails, the Court then directs the Sheriff to schedule the property for sale. The lenders will generally not let their foreclosed properties sell for less than what is owed to a public buyer. The majority of properties that go into foreclosure are worth less that what is owed on the home, either due to deterioration or over-borrowing on the equity. At the time of the auction, the lender’s representative is instructed to bid up to a certain price, usually above what is owed on the property. Sometimes that representative has an “upset” price, which is the maxmimum price that the lender is authorized to bid. This amount is announced by the lender’s representative to keep the lower offers out of the bidding process, keep the purchase price down, and save on commissions to the sheriff. Rarely are these final bids an indication of what is owed on the property, what the property is worth on the market, or how much the bank has in it.
2. The bank does not know the condition of the property (a.k.a. the bank doesn’t know how much I have to put into it to fix it up). The banks is very aware of the condition of the property. When a property is taken back by the bank, it goes through a thorough process to determine the condition and value of the property. Two or more real estate agents tour the property and complete a report for the bank. This report indicates any repairs needed to bring the property into good condition, a Comparative Market Analysis indicating value, and several pictures. Appraisals can also occur to help the bank determine the home’s value. The bank knows when homes need bath and kitchen renovations, they know about the roof leaks, and they know about the structural issues. In order for me to do my job, I want the bank to price their properties as accurately as possible. Why would I not report to them all the problems that would bring about a more accurate listing price?
3. You should lowball the bank. You SHOULD NOT lowball the bank. The banks go through an extensive process to accurately value their homes. You should treat a foreclosure home just like any other home on the market. The banks price their homes where they expect to receive an offer. Lowballing the banks should be looked at the same as lowballing a normal seller. If we think that $100,000 home should be sold for $50,000, we’d have recommended a list price of $54,900 in the beginning.
4. The bank will not care if I fix it up the property before the closing. This is a common myth that can get you into a ton of trouble. Not only are you violating laws by trespassing and modifying property that you do not own, you are also at risk of causing damage to the house. It’s common for accidents to happen and causing a fire to a house you don’t own can land you in a ton of trouble. At the same time, lender owned properties are known for having title defects that prevent them from closing. You may find yourself in a situation where you put time and money into a home that you are unable to purchase. Lastly, it puts the agent at risk of being fired by the lenders. Not only should buyers avoid working on the home prior to purchase, but they are also not to be visiting the property without an agent’s supervision. So think twice before you decide to attempt to work on a property prior to closing.
5. You can’t negotiate with the bank. Actually, you can! Banks will negotiate prices, closing dates, payment of closing costs, and have even compensated buyers for termite treatment. And since bank owned properties are strictly sold AS-IS, you should never expect for repairs to be made.
