Should I Buy a Foreclosed or Preforeclosed Home?

Should I buy a pre-foreclosure or foreclosed property?

Yes.

Which should you buy?

This is a tough decision because there are a lot of issues that affect both of these transactions. If you have a good REALTOR® working on your side then both of these transactions can be managed and the challenges can be overcome.

However, if you are choosing to go alone, or your REALTOR® isn’t on top of his game, then here is what you need to look for in each of these transactions. I’ll use the “SWOT” (Strength, Weakeness, Opportunities, and Threats) analysis to break them down for you.

PRE-FORECLOSURE

Strength

• Owner is probably still in the home. Hopefully they are maintaining it and have the gas and power still on. The little things to help protect in your investment.
• Timing. The bank doesn’t want inventory, and if you can save them money they could be willing to accept less now to keep from paying more later.

Weakness

• Owner could treat home as rental. Ever rented a car? Enough said.
• Psychological impact of dealing with a distressed property.

Opportunity

• Purchase a house below market value.
• Negotiating with a bank that has less invested to this point. (Compared to a foreclosure situation below)

Threats

• Taxes and other liens on the property. You are purchasing this home in a distress situation. If the owner is behind on his mortgage payments then he’s probably behind on his taxes and other items that would keep you from having marketable title. A good title insurance policy is a MUST when purchasing a home in any stage of distress.
• Investors. When a home goes into short-sale it brings out a lot of investors that are looking to make money at the owner’s expense. This is not a problem, except that it provides competition for the home and can/will drive the price of the home up.

FORECLOSURE

Strength

• Owner is no longer in the home. This is a psychological situation. You don’t see the pictures of their kids and such.
• If buying from a bank, the title issues will be cleared up prior to closing. 

Weakness

• Cost of foreclosure. The last average I heard was that it costs a bank $50,000 to foreclose on a home. They are going to “try” and recoup that if at all possible.
• Competition

Opportunity

• Purchase a house below market value.
• Longer on the market more willing the “owner” will be to move this asset.
• Inventory of these homes is very high and banks do not want to have to pa to carry the homes on their ledgers.

Threats

• Competition. Hand-in-hand with the inventory opportunity is that banks are pricing below-market to move the inventory. So, you will be seeing more competition as they purchase the home.
• Make sure the type of title you are being conveyed has issues clear title. Still make sure you get the most protection from the title insurance.

I am assuming that purchasing in pre-foreclosure is a short-sale orchestrated with the bank, while the post-foreclosure is on the open market. Purchasing a home at Sherriff’s Sale is often not a practical way to buy a home.

Why isn’t a Sherriff Sale practical for most people?

Well, let’s begin by looking at an announcement that was in the Delaware Gazette last evening. A home is appraised at $171,000 and cannot be sold for less than 2/3 of the listed price.

Wow, you mean I can go and purchase a $171,000 home for $114,570? What a deal!

Theoretically, yes it is. However if you show up at the auction it is a small group of people standing around and when this property comes up, the first bid will be for exactly what is owed the bank. Usually, well above 2/3 value, or the owner would have sold it for less to avoid a foreclosure on his credit report.

However let’s just say that you do bid $1 more than the bank and purchase the property. Did you bring your certified check for $17,100? That’s right. You are required to put 10 percent down on the home right on the spot. In this age of shrinking down payment, this usually sinks most Sherriff Sale would-be attendees.

But, you have that money to put down. Well take the next step and hire a Title Company to do a preliminary title search for you. I’ve heard too many horror stories of people buying a “perceived” good deal only to find it had a lien for a $5,000 tax bill on it. You’ll have to pay that off to even take title of the property.

So can you get a good property at the Sherriff Sale? On occasion, but it takes a lot of research and time on your part to make it successful.

Hopefully this helps.

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