What is a bank foreclosure?
These are homes that banks have taken back from the previous owner(s) due to non-payment of the home’s mortgage. Once the bank takes the home back through the foreclosure process, it will normally change the locks, winterize the home and do a “trash out,” which is where they remove any debris left by the previous owner. Sometimes they do some general repairs but a large number of these homes need some TLC.
Why can buying bank foreclosures be such a good deal?
Because most bank owned homes need repairs/updates/decorating, many buyers will avoid these homes and that in turn decreases the demand for these homes, depressing their prices. The other reason is that banks are very motivated (desperate) sellers and most will regularly continue to discount the price until they can sell it. In comparison, most traditional sellers have homes that are in relatively good condition and are resistant to take needed price reductions.
What are the drawbacks to buying a foreclosed home?
Since the seller (a lender) has never lived in the home, there is no knowledge of the property’s history or condition so you are buying the home “as-is.” While occasionally banks will do some basic repairs to the house, in many cases they refuse to do any work and will not permit the buyer to make repairs before closing either, which can make getting a loan to purchase the house more difficult. Many of these homes are purchased for cash or with renovation financing for these reasons.
What do they mean by “as-is”?
Banks have not lived in the house so they have no historical knowledge of the home and in most cases the asset manager has not even seen the house. This means that you get no disclosures, no warranties and no recourse for issues discovered later that a typical seller would have known about (i.e. mold, wet basements, snakes, hail damage). This is why you need to conduct your own inspection.
What is the difference between a city inspection and a buyer’s home inspection?
Many cities have implemented “time of sale” inspections for residential properties in their city. The overall goal of these inspections is to verify that the home is at a basic level of safe condition and is also used to reduce blight since they can call issues like peeling paint or broken gutters on the exterior. Some cities use a city employee to do the inspection while others allow private contractors to conduct the inspection. While these inspections provide some information, most of them are woefully inadequate as assessments of the house’s condition. While a private inspector may take 2-3 hours to do their inspection, the city required inspections are usually less than 30 minutes… sometimes just 15 minutes!
What if utilities are not on?
Unless you are a sophisticated buyer (corporation or other investor) you should always have the utilities on for your buyer inspection. So many things can only be adequately discovered when the house is operating in its normal condition. Another reason to get the utilities turned on is that lenders will require the home to be livable (utilities on & no big safety hazards) at the time the appraiser comes through, and if an issue is found at the inspection it could be addressed beforehand and save both time and the re-inspection fee.
What is renovation financing?
Since lenders that provide mortgages today now require the house to be habitable, things like the water, hot water, heat and electricity all need to be operable prior to closing. In cases where that is not an option, buyers can use a tool called renovation financing, which allows the cost of required repairs to be estimated, rolled into the loan, and then disbursed to the contractors that do the work after closing. In this way the buyer gets a fixed up house and did not need to come up with the money for the repairs out of pocket. The most commonly used program for this is called and FHA 203(k).
