When I began looking for a home on Long Island with a budget of $280,000 three years ago, finding a single-family home that wasn’t on the verge of collapse seemed almost impossible. Like many prospective buyers, I’d see listings for lower-priced foreclosures come up during my searches, but many were cash-only purchases since they were in too poor of a condition to be mortgageable. However, as I scoured the listings every day and dug into my hunt, I found that there were some that were eligible for conventional financing.
So I started submitting offers on those that appeared to be in fair condition (ones that had all windows, doors, interior walls, and floors intact). After many rejections, I eventually made an offer that was accepted and purchased a foreclosed home through the Department of Housing and Urban Development (HUD) last year. I don’t regret purchasing my home, but I do not plan to ever buy another one in this way. Every single step (and there were many!) was fraught with issues. Here are some of the lessons I learned along the way:
Pros and cons of buying a foreclosed home
Buying a foreclosure has its benefits; namely, that it’s often cheaper than buying a home the conventional way. In a foreclosure, you’re buying from the previous owner’s mortgage lender because the owner has defaulted on their loan. The reason a foreclosure is more affordable is that while a homeowner wants to make as much profit as possible, the bank mainly wants to recoup the remainder of the mortgage and any holding costs.
The lower cost of entry makes foreclosed homes attractive to house flippers and investors, who are increasingly buying up a large share of lower-priced homes. Investors snatched up one in five homes priced at the lowest third of the market in 2018, according to a CoreLogic analysis. These investors often make all-cash offers, which makes it difficult for an average buyer like me to compete. I lost many properties to all-cash bids.
Another consideration is the condition of the home, which has likely been vacant for months, and sometimes years. This can lead to burst pipes, pest infestations, and other issues. My own home was missing all of the breakers in the electrical panel—making it impossible to see what worked and what didn’t during our inspection. As a buyer, you have to weigh what you can afford to fix and what you can’t.
What are HUD homes?
A foreclosure is a home that has been repossessed by a lender after the owner failed to make payments. For a home that was purchased with a Federal Housing Administration (FHA)- backed loan, the Department of Housing and Urban Development (HUD) takes possession. It’s still a foreclosure, but HUD has its own requirements and process when it comes to selling the property.
One of the major differences between a conventional and a HUD foreclosure is the timeline: a normal home sale closes within two to three months, a HUD transaction like mine, is required to close within just 45 days. Within two days of offer acceptance, I had to procure a certified check for the deposit; then I had less than seven weeks to secure a mortgage commitment, an inspection (for which you’ll need the utilities turned on, in your name, if you want to test them, which P.S. you definitely do), an appraisal, the title search, and a homeowner’s insurance policy. It was the most stressful 45 days of my life!
One plus is that HUD gives preference to buyers who plan to occupy the properties like I did, meaning us homebuyers have an advantage over investors and flippers. There’s also the HUD Good Neighbor Next Door Program, which offers a 50 percent price reduction on homes sold to teachers and emergency responders, with the aim of revitalizing communities. A full list of HUD homes for sale in each state, including Good Neighbor Next Door homes, can be found at HUDHomeStore.com.
Things to consider if you’re thinking of buying a foreclosure
If I haven’t scared you off yet, here are six things to keep in mind as you move forward with your purchase plans for a foreclosed home:
Know your mortgage options. Researching different financing options early on will help you when it’s time to submit offers. In addition to comparing terms and rates from different lenders, look into rehab loans just in case the final house needs more work than you’d initially planned. Jim Barry, President and Certified Mortgage Consultant at Artisan Mortgage Company in Bay Shore, New York, advisors buyers to meet with multiple lenders early on to educate yourself on the basics of each loan and choose the best lender for your initial pre-qualification.
Also, know that even if a house is in good condition, it may not be eligible for some types of financing. For example, if a home doesn’t have appliances like a stove or refrigerator, it cannot get a conventional loan. Similarly, if while a home is going through foreclosure, it is winterized (pipes drained) or has the utilities are turned off, it will be ineligible for an FHA loan.
Make sure the real estate attorney is familiar with foreclosures. This is not the time to hire that friend-of-a-friend who happens to be a lawyer. Even if an attorney is HUD-approved, that doesn’t mean they’ve handled a foreclosure purchase before. Research attorneys before you get to the purchasing stage so that you aren’t left scrambling when it counts.
Get a top-notch home inspector. A good inspector is mandatory, especially for a home that’s been vacant for any length of time. I recommend hiring an inspector who is a structural engineer because they should be able to spot foundation issues, damage to support beams, and other big-ticket issues. Be sure to also check your inspector’s reviews from past clients. (I was so focused on the structural engineer part, that I didn’t bother checking online reviews and my inspector didn’t catch some significant damage.)
Attend your home inspection. And bring some flashlights when you do. (Even if you’re able to turn the power on prior to your inspection, that doesn’t mean the lights will work.) Ask questions and take notes as your inspector goes through your home.
Save, save, save! When it comes to finances, many buyers focus on the down payment and closing costs, but few people think about the water heater that looked fine during inspection but turns out to have a leak, or the refrigerator that can’t keep its cool. Always make sure you have some savings left over to cover unexpected hiccups, especially with a foreclosed home that has an uncertain past.
Plan to take on one project at a time. A home that’s been neglected, as many foreclosures have, will have issues. While it can be tempting to start tackling everything at once, focus on the most pressing items first.