After two short sales fell apart, I had a client recently tell me that she was not going to try any more short sales, but was going to look at homes that were already foreclosed.  She was experiencing the pain mentioned in What's So SHORT about a Short Sale. 

Arizona is 3rd in the nation right now in foreclosures so we have quite a few bank-owned or foreclosed properties.  The situation is pretty extreme in the Phoenix area, although we see our share of foreclosures here in Tucson as well.  So how does buying a foreclosure differ from buying any other home?

Price

Of course the first thing home buyers usually think of when they comtemplate buying a foreclosed home is that the price will be much lower than other homes on the market.  This is generally true, although lenders price according to the amount of repairs needed, etc, so it is not exactly an apples to apples comparison with the move-in ready home up the street.

One interesting pricing strategy that I have seen lenders use quite successfully is what I like to call "Fire-Sale Pricing".  That is, they price the home much lower than it should be even for a foreclosure and simply let the bidding begin.  They get 5 or 6 offers within the first week and sell to the highest bidder.  Sometimes they actually get more than they would just putting it up at a normal price.  Plus they get the added bonus of selling the house quickly instead of watching it languish on the market.

Condition

Many times a foreclosed home is a lower price, but more often than not, its condition reflects that price.  So if you're looking to buy a foreclosure it would be wise to have some cash set aside for repairs and/or cosmetic fix-up.  People who are in a financial position to be foreclosed on don't typically have the money for repairs or home maintenance and quite frequently foreclosures have deferred maintenance issues.

At times the maintenance issues can go further into very serious problems, such as extensive mold or other unsafe conditions, so if you're buying a foreclosure make sure that you get thorough inspections and that you notify your inspector that the home is a foreclosure.

Disclosures

One of the main drawbacks to purchasing a foreclosed home is the lack of disclosure about the property.  The lender is still required to disclose what they know, but the problem is that they don't usually know much of anything.  In Arizona, we have a Seller's Property Disclosure Statement (SPDS) which contains all kinds of information from the kind of pipes that are in the home to whether or not it has been treated for termites and who provides electrical service to the home.  If you're buying a foreclosure, you are foregoing all that information and will have to do more research yourself.  That is also another reason to make sure that your inspections are thorough.

Take it or Leave It

When purchasing a foreclosure it is wise to assume that you will be buying the house As-Is.  In fact, most of the foreclosed homes I've seen advertised in Tucson require that the Buyer sign an As-Is Addendum.  The bank does as much repair and clean-up as they are willing to do prior to putting the home on the market and they generally take the position that they are offering the home at a discounted price to compensate for the remaining fix-up that must be completed to make the home livable.

Once the buyer has completed their inspections, they get to make the decision to go forward with the home purchase or cancel the transaction.  They still have the right to ask for repairs, but their request will usually be denied.  There is an exception to this 'rule' however.  If there are repairs required to make the house saleable, the lender will usually complete them.  If they did not, then the buyer would walk and they would have to make the repairs anyway in order to sell the house to the next guy.

I attended an inspection with a buyer recently and we ended up in just such a scenario.  The water main to the house was leaking and water could not get to the home.  We could not even complete our inspection without running water.  Instead of the bank telling my clients that they will have to shoulder that expense and risk there being other leaks in the plumbing, they have opted to repair the pipe and allow us to complete our inspections.

Conclusion

Buying a home that has been foreclosed can be a very good deal, particularly if you have money to invest in fixing it up.  You generally end up with more in equity than the amount you spend fixing the property, particularly when you do some of the work yourself.   Buying a foreclosure is much faster than a short sale because it usually only takes 2 business days for the bank to respond to your offer.  This is much better than 2 months!!!  Even if you're a first time homebuyer with no money for cosmetic or other repairs, a foreclosure may be within your reach with creative financing that allows you to finance the repairs based on the repaired value of the home.

It's a buyer's market and there are plenty of options for everyone who is ready to buy!