Everyone assumes that a foreclosed home is a ‘steal.’ The bank wants to dump the property so they’ll take any bid they get.
This actually isn’t true. The bank wants to make the most money they can on what they now consider a bad investment. They lost money on the loan and now they are trying to recoup the money they lost. They aren’t going to just hand over the keys to the lowest bidder. Instead, they are going to get what they think is fair for the home.
What do Banks Charge?
So if banks don’t offer a ‘great deal,’ on foreclosed homes, what do they charge? The answers differ by bank and situation, but typically, banks charge the market value of the home.
You might think this is a steal when you compare it to what the original owner paid. Values today are lower in many areas than they were a few years ago. This means a lower sales price for today’s buyers. If you compare today’s sales price to the amount of the defaulted loan of the original owner, it seems like a great deal.
What you may not realize, though, is that you can probably pay the same amount or close to it and get a non-foreclosed home. You have to think long and hard if you want to take on a home that may not be in the best condition.
The As-Is Condition
The condition of the home is something to think about carefully. It doesn’t matter how cheap you can get the home if you have to dump a ton of money on it to fix it up. Most foreclosed homes are not in the best condition. The previous homeowners likely stopped maintaining the home when they became unable to afford the housing payments. Plus, the home likely sat vacant for quite a while before the bank was even able to get it on the market. The combination of these things can leave you with a less than perfect home.
When you buy a foreclosure, you buy the home in its current condition. You can’t negotiate with the bank to make specific improvements to the home before you will buy it. You either buy it or you don’t; it’s that simple. If the home needs a lot of repairs, it can greatly inflate the cost of buying the home. Suddenly your great deal might not seem so great anymore.
How to Get a Foreclosure Cheap
The best way to buy a foreclosure before it’s offered for market value is to buy it at the auction. Legally, foreclosed homes go to auction first. This usually occurs at the courthouse in the county the home resides. The bank will auction off the home starting with a bid equal to the minimum amount the bank will accept. This amount is usually equal to the amount of the outstanding loan. If you want the best deal on a home, this is the place to do it. Keep in mind, though, you buy the home sight unseen. You will not know what is wrong with the house until you own it. At that point, you are invested and will have to make the necessary repairs to make the home livable.
Why Foreclosed Homes in the MLS Cost More
If no one bids higher than the minimum the bank wants at the auction, the home becomes an REO or Real Estate Owned Home. The bank keeps possession of the home and turns the responsibility of selling it to a real estate agent. This works much the same way as if you were to sell a home you owned. The bank pays fees for the agent to market and attempt to sell the home. Because of this, the bank must charge more for the home in order to recoup its costs. This is why the cost of a foreclosed home and non-foreclosed home may be in the same ballpark if sold by an agent.
The bottom line is that you may be able to save money on a foreclosure. It just depends on which point you buy the home. If you wait until it’s sold by a realtor, you’ll pay more for the home than you would have at auction. Of course, buying a foreclosed home at auction is risky. If it’s your primary home, it might not be something you want to attempt. If you are an investor and you have the cash available to buy the home, it may be worth the chance.