One of the most common questions I am getting from clients lately is “what about foreclosures”. It seems that everyone out there has the belief that the best deal in Real Estate is buying a foreclosure. It does not help that every weekend you are almost guaranteed to turn on the TV and see some “guru” spouting off how he/she became an instant millionaire by buying foreclosures. There is one guy out there that really makes me laugh. He shows pictures of houses he supposedly bought for 12 cents. Come on, if he can buy properties for 12 cents, why is he on TV pitching his “full proof system”, he should be investing a dollar and buying 8 homes… Anyway, I regress, what I wanted to discuss today on the East Bay Real Estate Blog is my opinion in regards to buying properties in foreclosure. While you can find some deals, my advice is to stay away from buying a property being auctioned in foreclosure. Don’t confuse this with properties in the foreclosure process. Homes that are being foreclosed upon are not technically “foreclosed” until the property is auctioned off on the courthouse steps. In Alameda County you can go to the south side of the Oakland courthouse to bid. I would suggest against it, at least unless you are very experienced because of three main draw backs of buying in the foreclosure auction. The big disadvantages are:

· Lack of outside financing

· Lack of ability to do proper inspections

· Lack of title insurance.

First off, when you go to the courthouse to bid on one of the foreclosed properties you must show proof of funds to purchase. The proof of funds must be proof of liquid assets to purchase the home. A pre-approval letter from a bank does not qualify as a liquid asset. You must have some type of bank statement or equivalent showing you have the money ready to go in the event you have the winning bid. So you either have to have a lot of money in the bank, or set up your loan ahead of time so the funds are already available to you. If that is not a problem, the second major risk is the lack of proper inspections. Banks that are selling a house in foreclosure auction usually have not done any kinds of inspections to the house, and you better believe that the people that lost their house didn’t really care if the house you are taking away from them is in the best shape. Usually people that are losing their home are concerned with other things besides regular maintenance of the property. These homes are purchased “As-Is” and “Without Warranty” meaning that whatever problems you find are yours to deal with. I’ve heard of people finding major mold issues and worse with properties they purchased through foreclosure. If those risks are not enough, then know that you are buying without title insurance. That’s right, all those judgment liens, mechanic’s liens, or any other liens that may not have been known about stay with the property. You must do your homework ahead of time to try to make sure you receive title as clean as possible once you have the winning bid. I have heard of a case where after a property was purchased, a third party came out claiming they were the rightful owner of the property, and the other owner had just “borrowed” title so they could refinance the loan. If the buyer of this property had not had title insurance, it would have been a costly court battle.

Don’t get me wrong, I am not against buying a property at foreclosure auction, I just suggest you be very careful and have some experience before trying it. If the property does not sell at auction and goes back to the bank, you can then buy it as REO (a term used for bank owned properties). With REO you can do inspections, negotiate with the bank, and get title insurance. Short sales are another way to buy distressed property. These are properties where there is more owed then what the house is being sold for. These properties many times are in the foreclosure process, but have not reached the point where they will be auctioned off. You can get loans, do inspections, and get title insurance on these homes as well. It works just like a regular purchase.

If you want more information about buying distressed properties, give us a call, until next time…