●Foreclosed houses are typically sold as is. Foreclosed properties have often been abandoned for months — or years — and can fall into disrepair. They also can become targets of vandals and thieves.
Get a thorough home inspection. Be sure to look for mold, cracks in the drywall and especially for whether the plumbing is intact. The buyer is often required to conduct and pay for all inspections, including those typically handled by the seller. The buyer may be required to pay for the inspections in advance and will not be reimbursed if the sale does not go through.
When damage is found, it is usually the sole responsibility of the buyer to pay for any repairs and renovations. There is almost never any haggling with the bank over replacing the bathroom fixtures or kitchen appliances, or any negotiations for lowering the price to make up for the additional expenses incurred to make repairs.
●Real estate experts advise that before making an offer on a foreclosure — also called real estate owned (REO) — buyers should research recent sales of comparable homes in the neighborhood. In looking at houses with similar square footage, numbers of bathrooms and bedrooms and amenities, the buyer can better quantify the value of the foreclosure.
Once they determine they do want to make an offer on an REO, buyers should be prepared to move fast, because there are often multiple bidders. “There is not a lot of time for existential pondering when buying a foreclosure,” said Morgan Knull, a Washington-based real estate broker with Remax Gateway.
●The buyer should have a home inspector at the ready who is prepared to work on relatively short notice. The buyer’s financing also should be arranged before an offer is made.
Because the process of buying and renovating foreclosures is so complex, time-consuming and expensive, more and more large private-equity firms, such as the Blackstone Group, are rushing into the foreclosure market as a form of investment, as opposed to individuals and families who are seeking a primary residence.
David Kessler, national director of the commercial estate practice at CohnReznick, a national accounting, tax and advisory firm, said that during the past year, banks, as well as Fannie Mae and Freddie Mac, have been selling large portfolios of REO homes to private-equity investors who are looking to convert the properties into rental units.
The federal government has encouraged private investors to jump into the REO market through programs such as the REO-to-Rental Initiative of the Federal Housing Finance Agency (FHFA). When it launched the program in February 2012, FHFA said the REO initiative was designed to encourage qualified investors to purchase pools of foreclosed properties with the requirement to rent out the properties for a specified number of years. The government hoped the rental period would provide relief for those local housing markets that were hit particularly hard during the financial crisis, including Chicago, Atlanta and Miami.