Pros and Cons of buying a foreclosure?

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Originally Posted by Bill S

Buying a distressed property is like most things in Real Estate in that it is purely situational. By that I mean the quality of the deal is affected by a lot of variables; how much debt is on the property, what is the physical condition, does the price justify the repairs needed, what is the anticipated upside, are outstanding taxes an issue, etc.

You also need to differentiate between property going through the foreclosure process (public auction, deed in lieu etc.) and REO that is already owned by the Lender. You have different levels of risk associated with different stages in the foreclosure process.

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Thanks for the info, Bill. What are the differences in risk in a general sense between an REO property and a property going through the foreclosure process?

I spoke with a realtor relative today to get her opinions. In Minnesota, a home owner must disclose a wide array of info in relation to damage to a home from water damage all the way to whether the home was used to manufacture illegal substances (meth, etc). My understanding is that for a bank owned property, the bank does not disclose any such defects, problems.

In our area of the state which is essentially rural, we actually do have a big problem with meth manufacture and usage. Many old farmsteads, which are remote, relatively speaking are rented out since the owners are either dead or in nursing homes. Such properties are ripe for criminals to manufacture drugs. I've known one person personally that unknowingly bought a "meth home" about six years ago. I believe it was a foreclosure home but I'm not certain. Her and her husband had rapid and mysterious health problems and most of her hair actually fell out. Then they found out it was a meth home. The whole home was knocked down and removed from the site. To this day the only thing left standing is the attached garage. The house looks like it was ripped from the garage and the property is abandoned.

As you've said, Bill, naturally each property is unique with its own risk or lack thereof. I'm just trying to weigh risk in general vs. purchasing a non-foreclosure property.

Chris L

I read this post with interest and just had to Google it. You will learn a lot from Googling "meth home test." It looks like there are ways to find out fairly quickly whether or not meth was manufactured in the home.
Good luck Chris!

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Originally Posted by ChrisL

Thanks for the info, Bill. What are the differences in risk in a general sense between an REO property and a property going through the foreclosure process?
Chris L

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REO stands for" Real Estate Owned" which means that the Lender has received title to the property. As a result of an auction, a foreclosure suit or deed in lieu of foreclosure the Lender now owns the asset. While you can no longer pick it up at an auction (generally for the amount of the mortgage) you can still get a great deal and the process can give you some benefits. For example, you will have greater opportunity to tour and inspect the property so you can better assess the need for repairs in terms of scope and cost. Also, if there is a problem you now have the bank in the chain of title.

So, on the risk scale an REO property is higher than a conventional sale, but lower than buying at auction. The reward scale is generally the inverse.

Here is an article looking at some Foreclosure statistics

Housing prices are still going down. If you can rent for less or equal to comparable homes in the area I don't see any reason to not do that. You'll have no upkeep expense and no taxes.

Things may be different for others but based on what I have seen, a lot of homeowners with rent houses are charging less for rent then their mortgage is.

I would not buy a house thinking of it as an investment because it's not. If you plan to live their the rest of your life then all of what I said above doesn't matter.

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Originally Posted by Utopian

I read this post with interest and just had to Google it. You will learn a lot from Googling "meth home test." It looks like there are ways to find out fairly quickly whether or not meth was manufactured in the home.
Good luck Chris!

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Lick the walls and see the pink elephants :rofl2:

Seriously it is different in every area. Two houses in my neighborhood have been foreclosed on and resold by the banks. It is a nice area in the city and the people did not trash the properties. So the only thing that really needed to be done was paint and clean a little which you do in any new home purchase.

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The underlying feeling that I'd gain from someone else's misfortune either from poor choices or events beyond their control isn't pleasant, but I guess I could live with it if need be.

As a former 'victim' of a foreclosure, I wouldn't feel bad about what sme might consider benefitting from another's misfortune. You didn't take their home from them, the bank did. The attitude I took was that the bank didn't take my home, I gave it back to them. Not that I had a choice, but hey, fair is fair. I knew the risk and it's up to me to live with the consequence. If someone else got a good deal from it, more power to them.

(Incidentally, I've completely recovered financially. There is life after bankrupcy.)