There are of course pitfalls to most things in life and buying a foreclosure is no different. When you are buying a home in general, the buyer needs to be aware of certain things pertaining to buying a home. It’s a big investment for anyone, whether it’s your first home or 100th home. In a typical fair market setting (non-foreclosure property), there is usually a homeowner involved that can offer information on the home and answer questions about its history, things wrong, etc.
Conversely, when dealing with a foreclosed home, the homeowner is often long gone and who you are dealing with is the lender or government agency that has possession of the home. They typically don’t know any more than you do about the property. There are exceptions, but for the most part, since the lender has never occupied the home they would not have the knowledge one would have if they did.
The exceptions would be if the lender has had any inspections done on the property prior to listing. Some entities will have the heat and air inspected, maybe a termite inspection, etc.
If you are looking at purchasing a foreclosed home, make sure you have a home inspection done. Now, this is where it can be tricky. There are some entities that will allow you to turn utilities on, in the buyer’s (your) name, for inspections, however, if those utilities are not able to be turned on, then you can’t inspect them. For example, in New Jersey, the utility companies (electric/gas) will not turn on the utility of the property if it has been vacant for six or more months and the utility has not been active in that time period. They will tell you that you need to get a *”cut card”. The process to get this is time-consuming. This will take you past your inspection time frame and for some entities, like a HUD owned home, you won’t be permitted to do this process.
Now, all hope is not lost. There are some electricians that will do a generator by-pass to get the energy to a house for your inspection. Please note though that this is an additional cost the buyer will bear for the turn on. Likewise for water. A contractor/plumber can perform an air test to see if the plumbing will hold air. If it holds air, then the plumbing is good. If it doesn’t, the home likely has missing copper or plumbing breaks.
Another issue you may encounter is the type of financing you are procuring. If you are applying for FHA or conventional, these types of loans may not qualify for a foreclosure, especially if the foreclosure needs repairs or you can’t get utilities on. Again, don’t run yet. Short of having full cash to pay for the property, you can also look at the FHA rehab loan (FHA 203k). There are two options for this loan. If the repairs are less than $28,000 ($35,000 is the cap but they hold back some money for incidentals), then you would be able to apply for the “baby k”. If your repairs are more, you most likely will need the Streamline K. This will allow you to close as is, and will help you finance the repairs. Qualifying for an FHA versus an FHA 203k are different and not everyone qualifies for both.
Once you have financing in place, your closing agent will order title work to ensure that the property is free and clear of liens. Some foreclosure sellers will offer to pay for your owner’s policy of the title. While this is a great offering, it can be problematic. If you hire your own title company to run the title search, they will typically go back farther in time to ensure you really have clear title. Sometimes, a seller’s policy will not know about prior issues and sometimes they do and will “insure over” the trouble. Meaning, they will ensure that if anything becomes a problem, they will take care of it. I’m certainly not an attorney so don’t misunderstand my opinions on this topic, but… It sounds to me like sweeping a problem under the rug. I’m not in favor of doing that and would prefer, myself, to hire my own title company to ensure that the title is clear so that when I want to sell the house in the future, I don’t have to worry about tracking down someone to clear up a problem. Which could have been years prior.
All in all, buying a foreclosed property is not out of the question. You just need to know a little more about the process so you don’t have time delays, encounter costs for things you weren’t aware of and possibly lose out on buying that home you love because you simply didn’t know.
Definitions:
*Cut Card Process: Typically, it requires an inspection by a licensed professional such as an electrician for electric. Once the electrician has inspected and assuming there is nothing wrong, they will give a report to the town. The town will, in turn, come out and inspect the property and then issue the “cut card” to the utility company. Who will then, in turn, come out and inspect and turn on the utility. This process takes about 3-4 weeks if everyone is on top of the inspections.
