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Five Things You Should Know Before Buying A Foreclosure

Purchasing a bank-owned house is not like a "normal" real estate transaction.

By now, the general public has been exposed to so many evening news reports about foreclosures that the thought of buying one conjures up all sorts of images.

We've all seen the overgrown lawns, the hanging shutter, the houses full of trash and abandoned toys. Maybe this is why so many potential home buyers I meet assume bank-owned houses will be "trashed" or dirty. Unfortunately, many bank-owned homes have been remodeled and are full of renovations that the previous owner won't be able to enjoy. The homes often are spotless and have the refrigerators and washers and dryers that the previous owners left behind.

People also wrongly assume foreclosures are all in bad neighborhoods — they're not. They're everywhere, from Antioch to Blackhawk to next door to you, though some neighborhoods were obviously hit harder than others.

What most people don't realize is that buying one of these properties is not like a "regular" real estate transaction, in which you will be able to communicate and negotiate with someone who lived there.  Here are five things you should know if you're thinking of buying a foreclosed home in the near future:

1. Banks have a "take it or leave it" attitude.

Bank-owned properties are sold "as is" in most cases. This means no matter what you find wrong with the house during your inspections, the bank isn't going to repair it. In a normal real estate transaction, it's common for a seller and buyer to negotiate any needed repairs or problems on a house. In Contra Costa County for instance, it's customary for the seller to provide a Structural Pest Report for the buyer and then fix any items that are deemed "Section One," which include termite infestation, dry rot or moisture damage issues. Only on rare occasions will a bank credit the buyer money for a repair, or reduce the price to compensate for significant issues with a house.

2. Banks are like the mafia when selling a house: They know nothing. They saw nothing.

In a normal real estate purchase, the seller is required to "disclose" all sorts of information to the buyer. The seller is supposed to answer dozens of questions on everything from past repairs and remodeling to whether there are any neighborhood "nuisances," aka the barking dog you won't know about until you move in.

On a bank-owned house, the asset manager will draw a line through these forms and send them back blank. They'll also make YOU sign a form saying you realize they never lived there and so it's up to YOU to find out everything about the house before you buy it. Oh and by the way, the bank often will give you five to 10 days to do all this inspecting and answer-finding, whereas in a regular sale you could get 17 days.

3. Banks have high-priced lawyers who add their own "spin" to the real estate purchase contract.

In California, Realtors have spent years developing a purchase contract that is really, really good at protecting everyone involved in the transaction. It's intuitive, everything is thought of ahead of time. It makes sense. It is full of well-thought out clauses giving fair warning to everyone signing it, buyer, agent, seller, that they have to do their due diligence during this transaction. When you buy a property from a bank, before it signs anything, it will make YOU sign its "special addendum." I call it the "scary addendum," drawn up by the bank's lawyers and completely slanted in its favor. As Realtors, we are trained to tell buyers to consult their own lawyer before signing it--but nobody does. And, it always includes a clause that says something along the lines of "this addendum overrides your state's purchase contract."

4. Buying a house from a bank is like working with the Wizard of Oz. 

When buying a bank-owned property, you and your Realtor likely will feel like you have less leverage than in a normal transaction. The listing agent of the house will probably only return your agent's phone calls and emails through random text messages or vague emails that answer only half of the questions posed. The agent's voicemail will warn that he or she is far too busy to answer phone calls, so please only email or text. Banks tend to place too many foreclosure listings with their agents, who want to make the money for selling them, but can't possibly handle all the calls that come with it. 

You and your agent will feel like you are jumping through all the hoops for everyone and that no one else is helping or doing his or her part and you'll both be right. The banks wield all the power and leverage and have set up a perfect system of  non-responsibility that can best be described as: "If you want to buy this home, you will play this our way or leave."  

All of the power will appear to rest in the hands of the "asset manager" who in this drama plays the role of seller and decision maker. Like The Wizard of Oz, he/she is a very busy, seemingly omnipotent being who is no help at all when you or your agent have a question. The asset manager shows up at the very end to sign off on the deal. And remember, this is a bank you're dealing with so there are penalties for closing escrow late, sometimes up to $500 a day.

5. Just because it's a foreclosure doesn't mean it's a deal.

People often assume that buying a foreclosure means you're getting the best deal.  This is not always the case. The Smith home down the street that's a "regular sale" could be a better buy. As I tell my clients: Each house on the market is its own unique situation and needs to be evaluated as such. Sometimes sellers overprice their house and they have to learn their lesson when their house doesn't sell. They then do a price reduction. It's also hard for your agent to negotiate on your behalf when the seller and his or her agent (see above) won't communicate as would an agent listing a "regular" sale.

The moral of the story is buying a foreclosed property is nothing like buying a home in the "good old days," even if you are still in Kansas. Here are some foreclosed homes in the area:

243 Classic Way, Concord

5 bedroom, 2.5 bath, 2,263 square feet

$459,900

Beneath the shadow of Mount Diablo and in walking distance to
downtown Clayton within the popular Dana Farms neighborhood, this
spacious home has a lot to offer. It has a huge living room and a
separate family room with a wood-burning fireplace. The quarter-acre lot is great for entertaining and has an inground pool and mature landscaping. Desirable schools and shopping are nearby.

81 Bear Place, Clayton

5 bedroom, 3 bath, 2,843 square feet

$649,900

Built in 1997 on a big lot, this home is in the
upscale Oakhurst Country Club is a recent foreclosure. Though no
other photos are available yet, this property has a popular floorplan
because it has five bedrooms and one of them, along with a full
bathroom, is downstairs, perfect for guests or relatives.
Oakhurst offers beautiful views of the surrounding hills, Clayton and
Mount Diablo. Residents here have access to highly-rated Diablo View
Middle and Mount Diablo Elementary schools. Golf and tennis club
memberships are available. There are no homeowner association dues
in this neighborhood.

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