LEGAL NOTES

With interest rates again hitting historical lows for qualified buyers, savvy investors can take advantage of bargain prices in the residential Real Estate market. The current economic conditions make it a good time for investors to buy foreclosure properties to rent or as a primary residence. During economic downturns, foreclosures are everywhere, and even luxury homes in affluent areas have now hit the foreclosure market.

However, while the market has a record number of foreclosures, a new study shows that buyers are hesitant to buy them. A report by online Real Estate company Trulia and foreclosure data provider RealtyTrac reveals that more and more Americans are worried about the potential negative side of buying a foreclosed home. In fact, only 47 percent of the online survey's 2,033 respondents said they would consider purchasing a foreclosed home—down from 54 percent in a previous study in April.

The survey found that 80 percent of respondents believe there are negative aspects to purchasing a foreclosed home, an increase from 69 percent in the previous study.

Trulia and RealtyTrac also released data that named Pennsylvania as the state with the greatest discounts on foreclosed, bank-owned properties (REOs) compared to the median list price for standard properties. The companies report that the median REO price in that state is $25,000, compared with a typical median list price of $189,900. Vermont had the second-highest "foreclosure discount," according to the study, followed by New York, South Carolina, Alabama, West Virginia, Ohio, Kentucky, Tennessee and Delaware.

Among city areas, Henderson, NV, had the highest foreclosure discount, compared to the overall median list price, at 33 percent. Next on the list was Las Vegas, NV, at 24 percent.

Perhaps the reason that people are hesitant to buy foreclosed homes is that their expectations are too high. One of the biggest mistakes investors make is thinking that they will get a screaming deal on a highly desirable home. Some people expect to get as much as a 50 percent discount on a foreclosure. However, the reality is that the home will probably sell for only about 5 percent below market value. Fortunately, educated buyers can look for additional savings, especially if the home is purchased directly from the lender that holds the defaulted mortgage. Some banks and mortgage holders will agree to lower the interest rate or the down payment in an effort to quickly sell the foreclosed property.

Another challenge is that many buyers do not fully understand the risks and benefits of buying a foreclosure. In most cases, property owners enter the foreclosure process after months or years of struggling to keep up with their payments. Often, this means that they have neglected their homes, failing to make necessary repairs or keep up with maintenance. A buyer might get a discounted price on the home but then find himself stuck with a leaky roof, moldy floors, or even a destroyed kitchen. Smart buyers understand that repair costs should be considered when making an offer.

Anyone who is interested in purchasing a foreclosed home should take the time to learn about the foreclosure process. There are a few different ways you can buy foreclosures, and each carries a unique set of risks and benefits. These are the most popular:

• Pre-foreclosures, purchased directly from a homeowner before the bank forecloses
• At auction, where you place a bid, possibly in competition with others
• From a Real Estate company (known as an REO)

While auctions offer the most potential benefit, they also usually carry the most risk. In most cases, buyers cannot inspect the home before they buy it. In addition, they usually have to pay in cash. Often the new owner has to evict the old owner or renter.

Most banks also sell foreclosure properties through Real Estate brokerages. They are considered the safest and also the least financially rewarding of all foreclosure buying options. However, properties sold this way also tend to be in better shape, requiring less work for rehabilitation.

To summarize, bank-owned properties are the safest bet for foreclosure buyers, as these homes come with no liens, taxes, or tenants to evict. In addition, because banks are not in the business of selling Real Estate, they typically want to sell properties as quickly as possible. This can work to the buyer’s advantage, as the bank might be willing to offer attractive terms and low prices. For instance, a bank might offer to finance the property at a below-market rate or with a low down payment. Also, because the bank has already appraised the home, the buyer might not have to pay an appraisal fee. In addition, banks usually offer title insurance, which removes much of the risk that buyers face during the foreclosure process. No matter how you buy a foreclosure, keep in mind the Real Estate mantra “caveat emptor”—the buyer beware.

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Disclaimer: The above is not intended to be, nor is it legal advice, and should not be relied upon for any reason. Even though this article maybe disseminated throughout the U.S., the material covers only Nevada law, and no other. E RealEstateExec and Exec MediaGroup, LLC expresses no opinion on any other state's law, nor about the handling of any particular legal situation. You should consult your attorney, accountant or business advisor before undertaking any action. No attorney-client relationship is created between E RealEstateExec, Exec MediaGroup, LLC and the reader.