In working with homebuyers, invariably the buyers begin to look at foreclosures, hoping that the house can be purchased at a great price and that, after doing all the work, will have a lot of equity into the home!  And this thought is not a bad thought.  But, as I have advised my buyers, not all foreclosures are great buys, no matter how low the asking price is or how low you think you can get the home for!  So I have listed below my 10 DON’Ts if you are buying a foreclosure home!

1.  Don’t buy a home in the wrong area!   Although the number of foreclosures in the Richmond area is relatively low (compared to other parts of the country or the state), there are areas in which there are a lot more foreclosures than in other areas!  If you are looking in a neighborhood where there are a high number of homes on the market which are short sales & foreclosures, this may or may not be the right area for you to purchase in.  You should keep in mind that these homes will continue to impact the value of your new home until they are sold!  You need to keep in mind how long you plan to stay in your new home and make sure it is long enough to get the foreclosures & short sales in the neighborhood sold!

2.   Don’t assume it is a great buy!  This goes along with the first “don’t”!  Just because the price is low doesn’t make it a great buy!  Do your homework before putting your hard earned cash into the house!

3.  Don’t get caught up in a bidding war!  Know what your top figure is that you are going to pay for the house and if multiple offers come in, don’t go above your top price point!

4.   Don’t buy a home without an inspection!  Even if you are buying a HUD foreclosure where HUD has already done an inspection, pay your own inspector to go out and do inspections on your behalf.  This may mean that you will have to put the utilities on in your name and pay to have a plumber come in and de-winterize and then re-winterize the property.  But the money spent to find out exactly what you will have to deal with after closing is well worth the small investment you will make up front! 

5.  Don’t overpay for the home!  When you do decide to make an offer on the house, you need to keep in mind that it is an “as is” sale!  This means that the bank will make no repairs.  Therefore, you need to have a market analysis done before making an offer on the home so that you know just how much money you can spend between the purchase price and the repairs and upgrades after closing.  You do not want to overimprove the home for the neighborhood!  If the home will cost you $100,000 to purchase and it will take another $50,000 in repairs and/or renovations and upgrades, but the after renovation value is only $140,000 – then it does not make sense to buy this home, UNLESS you truly love the home and neighborhood and you are willing to overpay to be in this house and this neighborhood!  That is only your choice, but it should be an informed choice!

6.   Don’t buy the home without paying for a title search and an owner’s title policy!  In Virginia a homebuyer gets a general warranty deed conveying the property.  However, a foreclosure home is generally conveyed by special warranty deed, which is not as strong a deed as the general warranty deed!  Most lenders will require you to have a title search and will require you to purchase a lender’s title policy (which has limited protection for your title).  If paying cash, you may wish to save a little money on the title search and title policy!  But the small investment of money to have a title search done prior to closing can reveal if there are things like back child support and alimony judgments on the title, unpaid association fees, unpaid utility bills and other things that you may need to get the foreclosing bank to take care of prior to closing.  An owner’s title policy will offer you much stronger coverage on your title should any issues come up after closing that will affect your title (and remember, when you sell your home, you will need to convey a clean and marketable title to your future homebuyer)!

7.   Don’t expect the bank to make allowances for your situation!  When you buy a foreclosure, all the banks have addendums that they require you to sign in order to be able to purchase the home!  These addendums are all skewed in favor of the bank!  And all of them will have a per diem that penalizes the buyer if you don’t close on time, but do not penalize the seller if the property does not close by the time stated on the contract.  If you are currently a homeowner with a contract on your home scheduled to close on a particular day and you are moving to a foreclosure home, it does not matter to the bank that you want to be able to do a simultaneous closing.  You may need to be prepared to have a temporary place to live in until the foreclosure you are buying can go to closing!

8.   Don’t close on a foreclosure home without an attorney!  In Virginia, the buyer can choose to have either a settlement agent or an attorney do your closing.  Since there are issues that can arise when trying to purchase a foreclosure, it is always better to have a real estate attorney do your closing! 

9.   Don’t expect a warranty!  Since the foreclosing bank has never lived in the property, they will not be providing any sort of warranty on the property.  This is all the more reason to do your own due diligence on the property – any and all inspections, contractor bids on the repair work after closing, getting an owner’s title policy, using an attorney to do your closing!

10.  Finally, don’t go to an auction unless you are ready to buy!  This means that you either need to have the cash in hand or you must have your financing in place!  When buying a home at auction, you have a very limited amount of time to inspect the home (usually only a few hours prior to the actual auction), which means that you need to know what you are looking at when you inspect the home prior to the auction.  You also need to have a substantial downpayment to give at the time of the auction and you need to be prepared to close within a few weeks after the auction or risk losing your downpayment!  Additionally, if there are a lot of people at the auction, you may get caught up in the excitement and may end up overbidding for a home!  Be careful when going to an auction!

These are my 10 Don’ts for buying a foreclosure home!  I don’t want to scare any buyers from buying a foreclosure home – my only advice is that you should be careful and do your homework!  There are very good buys out there and I have had many buyers over the last few years get some very good deals on foreclosure homes, but they have all done their homework before buying a foreclosure home! 

So my advice to you – look carefully at the home, do a market analysis to know how much you can do before you have overspent for the neighborhood, do a home inspection, use an attorney, do a title search – and finally, buy a great home!