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August 12, 2009

Fantastic deal or financial disaster?

Buying a foreclosure can pose problems

Foreclosed homes are often a mess, both literally and structurally.

While the price may be right — oftentimes, well-below value — a foreclosed home can pose myriad problems — from costly repairs to lengthy negotiations — that potential buyers may not be willing, or able, to take on.

That’s why local Realtors advise buyers to do their homework and determine whether the pros and cons of buying a foreclosure weigh in their favor.

“Foreclosures are not for everybody, so buyers really need to keep their mind open to determine exactly what’s right for them, whether it’s privately owned, an estate sale or a foreclosed home,” said Eric Goosen, a Realtor with Real Estate One and owner of Goosen Realty in St. Clair Shores. “Of course, the most important thing, no matter what type of home you’re looking to buy, is being pre-approved, 100 percent unconditionally pre-approved for financing. If you’re not, you’re wasting time.”

After that, one of the most crucial things buyers need to know about buying a foreclosure is that it’s probably going to need at least some work before it’s livable.

“It seems to me that a lot of people think that they can get a house that might not need any work other than cosmetic changes, but the truth is a lot of foreclosures need a lot of work. It could be missing the furnace or even the kitchen, or it could need a new roof,” said Goosen, noting that if a home needs too much work, it may be impossible to get financing for the purchase.

“Repairs could be anything from minimal decorative things like painting or normal updates, such as new flooring or cabinets, to major repairs. Maybe the home wasn’t weatherized and there are plumbing issues,” said Karen Gillette, a Realtor with Real Estate One in Royal Oak, noting that it doesn’t take long for a home to become unlivable.

“When a house has been empty for a while, it gets to a point where no one’s loving it; it’s not being cared for or maintained, and buyers need to be aware that it may cost $10,000 or $20,000 to bring the home up to the standard they want to live in,” Gillette said. “One of the clauses in a foreclosure sale purchase agreement is that the property is sold as-is, so the burden is on the buyer to make any repairs.”

That’s why it’s essential to get a very thorough inspection, and in some cases, have a contractor go through the home to get an idea of the repair costs.

“We encourage all buyers to get an inspection, but especially in foreclosure or short sale situations, we warn the buyer that they’ll have to take care of all the repairs themselves,” Gillette said.

“It’s a good idea to bring a contractor along for the inspection to see how much repairs are going to run and to see if you should move forward with the purchase,” Goosen said, adding that there are programs available to assist with repair costs.

The Department of Housing and Urban Development (HUD) has a number of programs — such as HUD’s Title I Property Improvement and 203K Home Rehabilitation and Repair loans available through Federal Housing Administration (FHA) approved banks — to assist low- and moderate-income homeowners with needed repairs, including new roofs and furnaces, plumbing and electrical repairs, and modernization efforts, among others.

With the FHA 203K program, buyers can borrow a percentage of the difference of the house’s purchase price and the home’s assessed value to make needed repairs; however, Gillette said, “they’ll need a very detailed list of what needs to be done, and it will be double-checked by an appraiser, who will come through to make sure they’re doing all the repairs and not using the money for a vacation or something.”

Another key component in buying a foreclosure is patience.

“Buyers need to be aware if they’re looking at foreclosures, there is going to be a longer response time than with a traditional sale. What we’re seeing with the bigger banks is that from the time they get the offer, it’s been taking them at least 45 days to respond,” said Gillette.  “Beyond that 45-60 days from when the bank first responds to the offer … it can easily be another two to four months before they can move in.”

Also, contrary to popular belief, there is typically no room for price negotiations when it comes to buying a foreclosure.

“Most of the time, the banks will list the property at the price they want to sell it for,” Gillette said. “Buyers need to know that the price the property is offered at is the price they’ll have to pay. Banks typically are not willing to accept a sale price on foreclosures because these houses are already priced aggressively.”

That said, even if the foreclosure is bought at a great price, Goosen said the time and money spent bringing the home up to par may be more trouble than it’s worth.

“Buying a foreclosure is not necessarily a good deal, especially if there are major repairs involved — you don’t want to get into something that needs more work than you can handle,” Goosen said. “There’s a lot to be said for a seller-occupied home that’s well-maintained and updated: There’s no additional outlay of time or money spent, and oftentimes, especially in this market, they’re priced competitively.”

For more information on the HUD/FHA home repair programs, visit www.HUD.gov and click on Home Improvements. Goosen can be reached at (586) 771-1100 and Gillette at (248) 548-9100.