I have represented clients buying foreclosures, both at the courthouse steps in a live auction and in a more traditional manner. There is a misconception that buying a foreclosure (when the previous owner stopped paying the mortgage and now the bank owns it), is going to be a better buy than a traditional sale. I’m here to debunk that myth.
Here are three reasons why buying a foreclosure isn’t always the best deal:
- Price: Yes, in Los Angeles County the average price of a foreclosed home known as a Real Estate Owned (commonly known as an “REO”) property is $562,500 compared to a standard (traditional) sale of $655,000. However, keep in mind many foreclosed homes are in disrepair. Homes that need work would always go for less. Therefore, there needs to be a comparison of REOs to standard sales that were fixers. Although I have not found the data, my hunch is there isn’t much of a price difference. Thus, your discount is in the condition, not the status.
- Banks are difficult to negotiate with: If you are one of those that likes to haggle, this isn’t the place to do it. Often, they will not do anything to the property that you request, from repairs to price reductions. What you see is what you get. Conversely, if you are buying one that is a standard sale, you are dealing with a seller who may be more flexible.
- They will not provide any insight into the property: Because they never lived there, they don’t have the knowledge of almost anything important. This includes past leaks, work done without permits, or even if there was a death on the property. By way of example, I had a client buy a condo that was a foreclosure, and after we closed, leaks occurred. What did we find once we opened the drywall? That the plumbing was being kept together with duct tape! Because x-ray vision isn’t a thing (yet), there was no way we, or the bank, could have known.
Now, there are deals to be had and sometimes those include foreclosures. But there is more than just price that needs to be taken into consideration.
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