Buying Foreclosured Properties

Quite often potential home buyers ask about purchasing foreclosed properties. It is possible to save some money doing that. Consider all sides of the equation, including supply and demand. Let’s discuss.

A Bargain Might Not Be A Bargain – There are some foreclosures that can save a homebuyer a lot of money. Others might be one of the worst financial mistakes they make. Know the difference between a bargain and what seems to be one. Let’s provide a generic example.

Seldom is a foreclosed house in “move in ready” condition. All seemingly need repair. Assume a person has the technical ability, the time and the financial resources to fix or rehabilitate a house. Should he buy it? The answer depends.

Take a critical look at the property “as is”, the cost of repairing, and the estimated value when restored. Let’s say a foreclosed house is in a neighborhood where the property values are $200,000. The purchase price is $150,000. The house needs $25,000 in repairs. That sounds like a good deal. This person will own a $175,000 house in a $200,000 neighborhood.

Conversely, another house in the same neighborhood sells in foreclosure for $175,000 but needs $50,000 in repairs. That’s a purchase mistake. The owner has a $225,000 house in a $200,000 neighborhood. Carefully evaluate the purchase price and the repair costs.

An alternative might be to purchase a house that is not in foreclosure. Again – same neighborhood. In this house, the owner must sell a “move-in ready” house that is not in foreclosure. Seeing the competition, he sells it for $195,000.  Maybe that is not quite the bargain of the first example, but it is still a bargain.

Count The Cost – The purchase price is not the only factor to consider. Factor in the restoration cost. That is the only way to get a true “apples to apples” comparison. Ask a lender about a rehabilitation or home improvement mortgage. Do not put improvements on a revolving credit card. The interest rate is too high. High interest negates any perceived savings.

Fewer Foreclosures – Nationally the number of foreclosures hit a 4-year low in December, according to RealtyTrac, a foreclosure data company. The reason for the dip is because filings take longer now in an effort to insure there is no violation of the borrower’s right to due process. The foreclosure processing time increased during 2011 by 25 percent. So what does that have to do with anything?

Good News Mississippi – According to Realty Trac, during 2011, there were fewer than 3,200 foreclosures in Mississippi. That is one in every 400 homes.  Only South Dakota, West Virginia, Vermont and North Dakota had a lower foreclosure rate. The Mississippi foreclosure rate fell by 40 percent in 2011 versus the 2010 foreclosures in the state. As a point of comparison, in neighboring Alabama, the foreclosure rate was one in every 132 homes with more than 16,000 foreclosures in 2011.

Supply and Demand – There is a smaller supply of foreclosed houses on the market. That means if there is a greater demand to purchase foreclosed properties, the prices go up to winnow out the less motivated buyers.

That does not mean the end of foreclosed properties. It only means that if the current trend continues, there will be fewer foreclosures. There are still a number of properties eligible for short sale until the legal process runs its course.

What Is Good For Some Is Bad For Others – Every buyer wants a deal. No buyer wants to pay more than the fair market value for a house. The problem is if foreclosed or short sale properties dominate the market, what does that do for the honest, hard-working property owners that paid their mortgages but now must sell their home? This is a very real concern expressed by real estate leaders to politicians.

The result is incentives to sell or rent foreclosures and reduce the inventory in the free market. Expect the foreclosure problem to continue being a factor in the housing recovery in the foreseeable future. But also expect to see some volatility in the foreclosure market until the legal process and eligible properties stabilize.

What To Do – On any real estate decision, it is best to seek professional guidance and advice. That is the role of your REALTOR®.

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Andy Kalinowski is a REALTOR® and an Accredited Buyer’s Representative® with CENTURY 21 Doris Hardy and Associates, LLC in Columbus, Mississippi. Contact him by cell (or text) phone – 662.549.3421 or by e-mail – andyk@dorishardy.com.  He is also available for web video chat.