Foreclosures Are Not For Everyone

If you’re a home buyer today, it is tough to ignore the idea of buying a foreclosure.  I mean, the news is filled with stories, the pricing is amazing, and the money on the back end when you sell is pretty tough to walk away from.  Why wouldn’t you want to buy one?  Well, I believe that there are several reasons why, and as is so often the case, a lot of it depends on you.  There are also some other things to consider and this post will hopefully open our eyes to some of the things that might make you think twice about buying a foreclosure.

Disclaimer: I work with a lot of foreclosures and people buying them.  This is, by no means, intended to talk you out of buying a foreclosure.  Instead, my hope is that you will have the entire picture so you are able to make an educated decision.  This post is intended for people who are buying and intend to live in the home, not investors.  In this market, investors would be crazy not to buy foreclosures.

Why It’s All About You

Just like deciding how many bedrooms and bathrooms you want in your new home, making the decision about whether or not to purchase a foreclosure can be made very simple by asking some simple questions:

Do you have the cash? – Simply put, rehabbing a home costs money.  In many cases it can cost a lot of money.  Right now, the only loan program out there for people who want to buy a home and fix it up is the FHA 203(k).  Otherwise, you can get a loan for the house but will have to come out of pocket for the fix-up cost.  Before you say to yourself, “I know but I can fix it up over time.”, think about that and your current financial situation.  Do you live paycheck to paycheck?  If so, where is the money going to come from?  I can tell you from experience that the average investor rehab (keep in mind that investors don’t fix things up the way they would if they were living in the home) is between $15,000 and $20,000 in the Houston market.

Do you have the time? – If you have the money, do you have the time?  Rehabbing a home, even if you aren’t doing the work yourself, is a laborious process.  If you travel a lot or work long hours or can’t be reached during the day, you are going to have a very difficult time managing the process.  Even if you have a good contractor, it isn’t going to be easy.  What will happen when your contractor goes missing and you are at work?  Or, they have a question that needs to be answered right then and they can’t reach you?  What if you don’t get out to the home for a few days and realize things have been done wrong?  See where I am going with all of this?

Do you have the plan? – If you’re going to do this, know what you are going to do.  Making changes on the fly is not only time-consuming, but usually will cost you more money as well.  Know what you are going to do, what colors, what paint, what flooring, etc. before you start.

Do you have the know-how? – This is a very serious question.  It’s ok if the answer is no.  If the answer is no, the question becomes do you know enough to know whether or not the person you are going to hire has the know-how.  If not, don’t buy a foreclosure.  You and your family, if you have one, will be living in this home.  As such, you want to know that it is safe, sound, and not going to pose a risk to you or your loved ones.

What is your risk tolerance? -  This is a risky proposition.  You are going to buy a home as-is, where-is.  There is no warranty, no disclosures, no nada.  Are you willing to accept that risk?

Other considerations – Where will you live during the rehab?  If in the home, are you ready for that?  What is your time frame?  Are you going to overbuild for the community you are buying in?  Are you willing/able to stay in the home long enough for it to pay off?  Has all of this scared you?

Why It Isn’t All About You

Is the home where you want to live? – This all depends on your local market, but in many cases, foreclosures tend to be in areas where you might not want to live.  Do you want to live in a place you normally wouldn’t just because you got a deal?  Will you and your family be safe?

Is your time and money well-spent? -  Do you really want to make this kind of time and money investment in an area that has a lot of foreclosures?  Are you going to sink a bunch of money into making a beautiful home for you and your family only to have the homes around you rehabbed by investors and filled with renters?  That is not good for your resale value, undermining the entire reason that you bought a foreclosure!

Do you have a crystal ball? – Obviously the answer to this one is no.  None of us do.  The future of your market area is a consideration though.  Let me give you a real life example to help explain this one.  I have a client who has been looking for a foreclosure.  He is a single guy, first-time buyer, but works for a home builder and knows what he is doing.  We have looked at several homes only to walk away from them because of the community.  We decided that he was not willing to buy in a community that wasn’t complete, a community that had several foreclosures, or a community that wasn’t either part of or very close to one of the larger, master-planned communities in the area.  His thinking is that if a community has either a bunch of foreclosures or is incomplete, there is too much risk involved.  What happens if the homes around his become rentals or if a sub-par builder finishes out the community?  He is not willing to take that chance.  Instead, we are on the lookout for homes that are in safer areas from an investment standpoint.

Again, this is not intended to talk you out of buying a foreclosure.  They are great investment tools, whether you are going to live there or rent it out.  However, if you can’t honestly answer the questions above with some level of certainty, maybe you should look somewhere else.  There are plenty of homes out there that make a safer, easier decision that are still priced very well.  In fact, for an end-user, there hasn’t been buying conditions like this in a very long time when you combine pricing and interest rates.  In the end, it all comes down to you.  So, skip the flash of the rehb shows on TV and really sit down and consider your decision thoughtfully.  You will not regret it, even if you don’t change your mind.