Let’s begin our discussion by defining the relevant terms. Technically, a foreclosure is a bank owned property or REO (real estate owned).  The foreclosure process has been completed and the bank now owns the property.  Next the bank lists the property with a real estate agent to sell it.  This differs from a pre-foreclosure where the owner of the home still owns it, and probably still lives in it, but is the home is in the process of being taken in a foreclosure auction (in our county is it at sheriff’s sale).   You probably have heard of short sales, in which the bank takes less than what is owned as payment in full for the mortgage.  A short sale is done on a pre-foreclosure property.  I will do another post on buying a short sale.

Here are the pros and cons of buying a foreclosure:

Pros:
Probably discount price
Possible special financing from lender

Cons:
Property is generally in poor condition
Bank processes are slow, you must have patience
May have to sign special addendums from the bank
May have difficulty getting funding

During the foreclosure process sometimes the homeowner becomes angry and damages the property or removes items that would normally remain such as appliances, light fixtures, and even kitchen cabinets (actually happened with one of my listings.)  So REO properties are generally in poor condition.

REOs can often be purchased for below market value.  When the bank puts the property on the market, it generally lists it for market value, but as time passes, the bank will instruct the real estate agent to make price reductions.  During this time the property is being taken care of by the real estate agent on behalf of the bank.  But since it is usually vacant at this point, the home is vulnerable to vandals or in winter pipes bursting.

When making an offer on a REO you must keep in mind that the bank usually will not make any repairs to the property, you are taking it strictly “AS-IS.”  So, if your home inspection shows any major defects your only choice will be to cancel the purchase, pay for the problems yourself, or try to renegotiate the purchase price with the bank.  If you do go forward with the purchase you need to be prepared to take on the problems and responsibilities of the property both the ones you can find yourself or through a home inspection and hidden problems that may not be found before the purchase. 

Sometimes the home inspector will not be able to inspect all systems if the property has been winterized or the utilities turned off.

If the properties you are considering are in poor condition it is likely you will need to make a low offer in order to make it worth your while to take on the problems that the house may have.   If you will be making low offers be prepared to have many of your offers rejected.  But keep going and you will likely find a bank who will take you up on it.

It is also worth pointing out that banks tend to take their time in making a decision as to whether or not to take your offer or make a counter offer.  You must be very patient.  Your patience is the tradeoff for getting a bargain. 

There is one other pitfall that you need to be aware of.  If the property is in poor condition it will be nearly impossible for you to get a conventional mortgage loan.  You will either have to buy the property with cash or use a rehab loan.  FHA offers a rehab/purchase loan program for this purpose.

So, if you would still like to purchase a bank-owned foreclosure in Monmouth County, NJ.  Contact me and start making offers.

If this all seems too much for you, please shoot me an email or give me a call.  There are other bargain properties that are not bank owned that may enable you to achieve your dream of homeownership.