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Knowing the Ropes in the Foreclosure Purchase Ring

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MORTGAGE
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I'm using a little bit of boxing terminology here because buying a foreclosure property can be a lot like a boxing match. You definitely need to know that it's an adversarial process; the bank is not your friend. In fact, during the negotiation and closing process you may wonder if the lender even wants to sell the home.

I've bought a great many foreclosure properties over the years and can tell you that you can end up pulling your hair out if you're not prepared for the hurdles the lender places in your path to a closing. I'm going to share some of the pitfalls and headaches with you here, but it's definitely not a complete list.

"As-is" means nobody knows: the bank normally has no knowledge at all of the condition of the property, and you'll be signing that you're buying it "as-is" no matter what's wrong with it. In a recent purchase, though even a cursory look would lead you to suspect problems, an inspection turned up the need to replace the entire roof and much of the plumbing system damaged due to freezing weather. Once you do their job for them and pay to turn up the problems, don't expect any changes in price or concessions due to condition.

Listing broker is little help: the agents who list foreclosure properties for the bank become very good at filling out the bank's online forms and following their instructions to the letter. If they don't, they get stuck without reimbursement for payments they've made for things like utilities and repairs. They aren't going to be of much help when you're upset with the process or the banks' shenanigans. They're also almost always taking a reduced commission, so their goal is to get the deal to closing without a lot more work, as they've been taking care of the property for a while.

One-sided Contracts: in nearly every state, real estate agents have purchase contracts mandated by the state or real estate associations, and they're used to using those contracts that are designed to be fair to both sides of the transaction. The first thing you'll almost always see when that contract is submitted to the seller is the return of an addendum/amendment that changes or does away with just about all of the protections for your side. It's likely that:

  • The bank will absolve themselves of any liability for property condition.
  • The contract will allow the bank to be late in closing or even completely back out of the deal at any time for any reason.
  • However, you will be agreeing to close on time or be subject to daily penalties of from50 to200 in most cases.
  • The bank will routinely question every document and take days to weeks to review even the simplest single-sentence document. Their contract addendum will allow this with no recourse by the buyer. If those delays cause your side to not be able to close on time, you may be paying those penalties though they caused them.

You'll pay when they won't: the banks will refuse to pay "normal and customary" closing costs, including some attorney fees for preparing deeds, water rights or other documents you need. You'll see those refused charges showing up on your side of the HUD statement.

Those are a few of the most common issues you'll face when you're buying a foreclosure property. I'm only giving you this information to help you to prepare for the process, as many of the very best deals I've made over the years have been foreclosure purchases. Be prepared, put on the gloves, and come out fighting.

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