Reasons Foreclosures Aren't Always The Best Deal

I always have clients that come to me and say I want to buy a foreclosure.  I ask why? They proceed to tell me because they are good deals!  Home foreclosures occurred in healthy real estate markets in the past, but became far more prevalent after the housing market crashed in 2007. Foreclosed properties are bank-owned homes, also referred to as real estate owned (REO) properties. Banks can foreclose on a property after 90 days of mortgage nonpayment. Homeowners default for many reasons, including loss of their jobs, unrelated financial stress or intentional nonpayment to escape severely underwater mortgages.

Regardless of why homeowners default on their mortgages, banks repossess foreclosed homes and resell properties to recuperate their losses. 

I always have clients that come to me and say I want to buy a foreclosure.  I ask why? They proceed to tell me because they are good deals! 

Read below maybe this will change your mind on why a foreclosure isn't always the 'best deal"

1. Competitive Sales

Everybody always thinks that a banks aim is to offload REO-related property taxes and liabilities as soon as possible. They  think they price properties to sell.  Do you know I just received a price on a home from a bank this week $50,000 over the last comp!  This home is not competitively priced what so ever.  Most banks are now pricing their homes competive with or above current comps.  Banks seek all-cash offers or offers from pre-approved buyers with trustworthy credit and sizable down payments. Most first-time buyers cannot compete with investors who swiftly identify quality REO homes, move quickly making enticing offers and close without financing procedures.

Additionally, if experienced real estate professionals don’t make offers on an REO property, first-time buyers are wise to avoid it, too. Investors often look for homes to flip, and even buyers shopping for fixer-uppers should carefully heed the warning of disinterested experts.

2. As-Is Condition

When you visit an REO property, they don’t have the luxury of visualizing their lifestyles in nicely-staged environments. Foreclosed homes often sit vacant on the market for a period of time before they’re even put on the market. Buyers must stay open minded to see the potential in each property. Consider too that vacant properties sometimes don’t have electricity to power lights for walk-throughs.

Further, buyers of foreclosed homes do not receive property disclosures. Since banks are unfamiliar with the history of properties, buyers accept the risk of purchasing homes with unforeseen damages. It’s unlikely that previous homeowners who couldn’t afford their mortgages were prioritizing property maintenance, leaving repairs for future owners. Buyers should hire thorough home inspectors to survey properties before making offers.

Unlike other for-sale listings, buyers cannot negotiate with sellers (banks) to make upgrades to properties before closing. Banks intentionally price properties low accounting for buyer upgrades. Buyers of foreclosures must prepare to purchase homes in as-is condition.

3. Long-Term Vacancy and Vandalism

In addition to the aforementioned vacancy concerns, some REO properties remain vacant for extended periods of time. Pipes freeze in the winter when homes aren’t heated, bursting and causing costly water damages. Rodents and even homeless transients take refuge in abandoned properties. Before making offers, buyers need to evaluate the health concerns and total costs of repairs to create livable conditions in REO homes.

Banks sometimes permit short sales when borrowers are underwater on their mortgages. Short sales occur when banks accept the resale of a property for lesser value than borrowers currently owe. Short sales are sometimes more cost-effective for banks than allowing 90 days of nonpayment followed by property marketing resale. In many cases, banks do not permit short sales resulting in disgruntled homeowners.

Upset, angry or financially stressed homeowners facing foreclosure often strip properties of removable, valuable features and even intentionally vandalize properties as retaliation. Buyers should account for the costs of replacing appliances and fixtures including dishwashers, sinks, toilets and light fixtures. A foreclosure property may not be worth the inexpensive price tag if countless big-ticket items are missing.

In all, buyers have numerous factors to consider when shopping for homes; one of the major influencers is price. REO properties may meet that objective at first glance, but the challenges of competing for a quality home, the risk of unforeseen damages, the health concerns of unkempt properties and potential costs of stripped appliances may dilute the bargain.

Why Should You Buy A Home Now?

It's that time of year, the seasons are changing and with them bring thoughts of the upcoming holidays, family get togethers, and planning for a new year. Those who are on the fence about whether now is the right time to buy don't have to look much farther to find four great reasons to consider buying a home now, instead of waiting.

1. Prices Will Continue to Rise

The Home Price Expectation Survey polls a distinguished panel of over 100 economists, investment strategists, and housing market analysts. Their most recent report released recently projects appreciation in home values over the next five years to be between 11.2% (most pessimistic) and 27.8% (most optimistic).

The bottom in home prices has come and gone. Home values will continue to appreciate for years. Waiting no longer makes sense.

2. Mortgage Interest Rates Are Projected to Increase

Although Freddie Mac’s Primary Mortgage Market Survey shows that interest rates for a 30-year mortgage have softened recently, most experts predict that they will begin to rise later this year. The Mortgage Bankers Association, Fannie Mae, Freddie Mac and the National Association of Realtors are in unison projecting that rates will be up almost a full percentage point by the end of next year.

An increase in rates will impact YOUR monthly mortgage payment. Your housing expense will be more a year from now if a mortgage is necessary to purchase your next home.

3. Either Way You are Paying a Mortgage

As a recent paper from the Joint Center for Housing Studies at Harvard University explains: “Households must consume housing whether they own or rent. Not even accounting for more favorable tax treatment of owning, homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord plus a rate of return. That’s yet another reason owning often does—as Americans intuit—end up making more financial sense than renting.”

4. It’s Time to Move On with Your Life

The ‘cost’ of a home is determined by two major components: the price of the home and the current mortgage rate. It appears that both are on the rise. But, what if they weren’t? Would you wait? Look at the actual reason you are buying and decide whether it is worth waiting. Whether you want to have a great place for your children to grow up, you want your family to be safer or you just want to have control over renovations, maybe it is time to buy.

Bottom Line

If the right thing for you and your family is to purchase a home this year, buying sooner rather than later could lead to substantial savings.

What is a Consumer Score?

What is a Consumer Score?

The three credit bureaus, in their understanding of the credit scoring model created by FICO, decided to create their own scoring models, and in 2004 – 2006 they unveiled the “consumer” scores: Plus Score, Trans Risk Score, Equifax Credit Score, and Vantage Score. However, these are not genuine FICO scores, and mortgage lenders don’t use them. Consider this comparison: Would you buy a watch that gives the approximate time of day? The three credit bureaus work with major financial institutions, professional organizations, comparison sites, personal finance businesses, clubs such as Costco, AAA, Sam’s Club, and many data-mining brokers to bombard consumers in the race of the free credit score mania, all with the enticement of a “consumer” score that is not used by lenders, in hopes of obtaining subscriptions or fees from consumers. Fees that are totally unnecessary!

WHAT IS A F-I-C-O SCORE?

What is a FICO Score?

In 1958, Bill Fair and Earl Isaac, a mathematician and engineer, formed a company in San Rafael, California. They created tools to help risk managers make a better decision when taking financial risk. Today, 90 percent of all lenders use the FICO score, first created in 1989 by Fair Isaac, and it’s the only score Fannie Mae and Freddie Mac, the Federal Housing Agency and Veterans Affairs will accept in underwriting loans they guarantee.

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Reason #7 Buyers May Dislike A Home

Some home buyers have a love-hate relationships with the properties they see. They either fall madly in love with a place, finding no faults, or are totally disgusted, even outraged that I would dare show them something so terrible. 

Sometimes, underlying a buyer’s rejection reaction are their own irrational expectations or other psychological quirks. But other times, there are hidden issues that can cause a gut reaction of hate toward a particular home.

Here is reason #7 a buyer may dislike your home:

7.The wants and needs of hidden stakeholders.

Have you ever watched House Hunters International? I crack up every single time a family moving from Minnetonka to Dubai decides not to buy a given home because it lacks room for their friends and family when they come to visit. “How often do they think people are going to make that trip after all?! And can’t they grab a hotel room when they do?” I have heard they are really nice there! I always wonder (often aloud, to the puzzlement of my dog).

While this particular example is comical (and possibly scripted for TV), the reality is that many real-life buyers consider the wants and needs of people their agents will never meet as they decided whether to love or hate a particular home. For instance, over the years I've had multiple buyer clients refuse homes with stairs to enter because of aging parents who might only get to the place once or twice a year. I've also seen buyers make decisions about homes they intend to live in for a very long time on the basis of children that don’t yet exist, roommates and tenants they might never have, dogs that they are going to get 'someday', and expected age-related mobility concerns for their future selves, decades down the line.

In the end, it is very important that buyers agent help buyers to see past the issues we have been talking about for the last week.  Maybe these issues aren't really all that important.

Reason #6 A Buyer May Dislike A Home

Some home buyers have a love-hate relationships with the properties they see. They either fall madly in love with a place, finding no faults, or are totally disgusted, even outraged that I would dare show them something so terrible. 

Sometimes, underlying a buyer’s rejection reaction are their own irrational expectations or other psychological quirks. But other times, there are hidden issues that can cause a gut reaction of hate toward a particular home.

Here is reason #6 a buyer may dislike a home.

6. Competition fears.

I recently had a buyer text me the address of a home they saw for sale, listed within their price range. A moment later I received another text from the same buyer: a note that they know they’ll never be able to afford it because of all the traffic they saw at the open house and the multiple offers they assumed would result. It’s great for buyers to have a realistic understanding of local market dynamics like whether it’s a buyer’s or a seller’s market, how long homes tend to stay on the market, whether they should expect to compete with other offers and how much above or below asking homes usually sell for.

But in a hot market this can result in buyers disqualifying themselves, mentally, from homes on which they should be making offers. Sometimes buyers trust their own knowledge too  much instead of their agents knowledge!

Reason #5 A Buyer May Dislike A Home

Some home buyers have a love-hate relationships with the properties they see. They either fall madly in love with a place, finding no faults, or are totally disgusted, even outraged that I would dare show them something so terrible. 

Sometimes, underlying a buyer’s rejection reaction are their own irrational expectations or other psychological quirks. But other times, there are hidden issues that can cause a gut reaction of hate toward a particular home.

Here is reason #5

5. Furniture foibles.

Is it irrational to make a decision about buying (or not buying) a particular property around your furniture? Probably so. Do people do it every single day?

Absolutely.

Buyers who have a house full of furnishings of a particular style or scale might recall the time and money they invested obtaining it and decide to hold out for a property that has a harmonious look, feel or scale. As well, many a buyer has hemmed and hawed about a house because their great-aunt’s/Grandma’s/Mom’s inherited dining room table would never fit.

Crazy, right?

Reason #4 A Buyer May Dislike A Home

Some home buyers have a love-hate relationships with the properties they see. They either fall madly in love with a place, finding no faults, or are totally disgusted, even outraged that I would dare show them something so terrible. 

Sometimes, underlying a buyer’s rejection reaction are their own irrational expectations or other psychological quirks. But other times, there are hidden issues that can cause a gut reaction of hate toward a particular home.

Here are a few I’ve seen time and time again:

 4. Childhood beliefs.

Where I grew up, corner lots were generally the premium lots of a subdivision. But in some areas, especially ones with many cars, apparently there was a time when there a series of serious accidents occurred, with cars ending up inside homes in part because the lots were positioned in a particular way vis-a-vis traffic flows and stop signs.

I have had numerous clients over the years mention this, and specify that they are completely uninterested in living on a corner, for this precise reason. Other buyers I have prefer corner lots for the privacy and the lack of surrounding neighbors. Each has there own opinion.

Reason #3 A Buyer May Dislike A Home

Some home buyers have a love-hate relationships with the properties they see. They either fall madly in love with a place, finding no faults, or are totally disgusted, even outraged that I would dare show them something so terrible. 

Sometimes, underlying a buyer’s rejection reaction are their own irrational expectations or other psychological quirks. But other times, there are hidden issues that can cause a gut reaction of hate toward a particular home.

Here is the 3rd reason I have seen buyers dislike homes:

3. Failure to Optimize.

“That’s a shame.” “What a waste.” “Too bad they did that.” “Why would they tear that down/choose that finish/put that in?!” 

Buyers hate little more than to move into a home and spend their precious remaining dollars ripping out nearly new upgrades—especially when they feel like they paid a premium for the home having been remodeled in the first place.

Well, there’s at least one thing they hate more: a home that they came to see because of its perfect location or mid-century modern/Victorian/Craftsman architecture that’s been built or remodeled in a way that totally eliminates the advantages of the features they came to see it for. A home with a gorgeous view with few windows (trust me, they exist) is one case in point. Another is the Craftsman bungalow that has been all modernized inside, built-ins removed and natural wood ripped out.