What the F… Foreclosure, I mean

Everyone in the real estate market is looking for a good deal, but is a foreclosure property the right choice? There doesn’t seem to be a day that goes by that I don’t receive this question from a client. We all want a great deal in this saturated real estate market, it’s competitive out there, it’s hard, and it’s emotional. To make the best decision possible for you and your family, let’s shed some light on the process, which is likely different than what most consumers think that it is.

The Auction process

A true foreclosure is a property where the owner has fallen behind on their property taxes, mortgage payments or another form of debt that is secured by an interest in their home. This means that if a borrower doesn’t pay, their bank can take their home and auction it in an effort to be compensated for the debt.

In North Carolina, the majority of foreclosures are nonjudicial, which means that the lender doesn’t have to file a lawsuit against the buyer, however, there will need to be a hearing in front of the clerk of courts in the county where the property is located. Once approved by the clerk, the home is advertised and a notice of sale is sent to the owner.

This is where things get confusing for someone looking to purchase a foreclosure! Foreclosure sales are auctions, not foreclosure postings on popular real estate websites. To participate in an auction you need cash, and you may be buying a property with undisclosed debts tied to the title. Even if you win a foreclosure auction there’s a 10-day upset bidding period, which means someone else can still outbid you (which may trigger another 10-day upset bidding period) or the homeowner that was foreclosed on can redeem their property and cancel your purchase.

Foreclosures Listed on Real Estate Search Websites

Foreclosure properties listed on the consumer websites are most-likely bank-owned homes. These homes have gone through the foreclosure process and are now being listed for sale, so the word ‘Foreclosure’ is more of a marketing term than anything at this point. However, there are still some significant stumbling blocks to ownership for the average homebuyer.

Properties listed as foreclosures are likely to be distressed properties. When someone knows their home is going to be foreclosed on, they are less likely to take good care of it. When the bank takes over ownership it really wants to offload this property and therefore offers the home in as-is condition. This could mean that the property is not even in an inhabitable state. There could be major foundation issues, mold, holes in the roof, you name it. North Carolina is a buyer-beware state, so it’s extremely important to know what you’re about to enter into if you decide to go under contract on one of these homes.

If you are using traditional financing such as a mortgage of your primary residence, the homes needs to be deemed inhabitable for your bank to go through with lending on the home.┬áThe bank will send out a property appraiser to walk the home and research recent sales for similar properties in the area. This ensures that the money the bank is going to lend to purchase the home, is being used for an asset that is worth that amount of money. This also covers them if they need to foreclose on you if you don’t pay your mortgage and then sell the home to cover your defaulted mortgage.

During the property appraisal, the appraiser may deem the home uninhabitable unless certain items are fixed. This stops the purchase dead in its tracks. Without those fixes being made to the home, the lender won’t go through with lending you the money to purchase the home. How could this home be your primary residence if it’s too dangerous to live in?

This puts the borrower in quite a dilemma, because the seller has made it clear that the home is to be sold in its “as is” condition, and that they will not make any repairs. So it’s up to the borrower, who legally can’t make those repairs because they don’t own the home. So, the sales transaction is now in a stale-mate. The borrower is out of a lot of money in due diligence and earnest money fees, appraisal fees to the bank and possibly inspections, but they don’t have a home.

How do you know if a foreclosure is right for you?

If you are looking at foreclosures as your primary residence, it’s important to understand the pitfalls. This is why I ask each one of my clients that would like to pursue a ‘foreclosed’ home these two questions:

1- are you financing your home with a mortgage or are you paying cash?

2- how risk-averse are you? (i.e. what’s the risk profile of your investment portfolio? or, How do you feel when the stock market goes down and negatively impacts the balance in your 401k account?)

If a client is using a mortgage to finance their purchase and they don’t have a healthy appetite for risk I advise staying out of the foreclosures arena. There are many beautiful homes for sale that don’t have the headaches associated with foreclosure homes.