Buying a foreclosed home can be a sound real estate investment and a good way to generate revenue from a rental property.
The time is right, because the rental market is in high demand. But you will want to gather as much knowledge as possible before venturing into the high risk business of purchasing a foreclosed (or distressed) property. It will require a higher level of diligence and differs from regular home sales in several ways. My intention is to help you better understand the world of bank owned properties in order to avoid some of the pitfalls.
What It Means
Foreclosure removes the right of the home owner to redeem the mortgaged property when they default on the mortgage agreement. When Mortgage Default occurs, the lender will take legal action to protect their security. Once a property is subject to foreclosure proceedings, the court will instruct that the property be listed for sale by the court (a Judicial Sale).
In the case of a foreclosure, when an offer is received, the listing Realtor passes the offer to the lender’s representative. The representative then brings the offer to the court for consideration. When the foreclosure property is listed on the MLS, the listing agent will advertise that property to as many purchasers as possible in hopes of get a suitable offer for the lender.
In BC the courts will ensure the homeowners are protected. The property may still be owner occupied up until the possession date and therefore showing can be limited and difficult due to the nature of the circumstances.
Property in foreclosure in BC is marketed and sold for an amount as close to “Fair Market Value” as possible. Buying a foreclosure could save you money on the purchase price, but rarely does a property sell for less than 20% below fair market value.
Disclosure and Risk
Property being sold in a foreclosure action is purchased “as is where is,” There is no guarantee that the property will be in the same condition on the possession date as it was on the day it was first viewed by the buyer. The buyer is accepting the property “as it is” on the completion date of the sale with no representations or warranties as to the condition of the property.
In a normal non-foreclosure listing, sellers are asked to fill out a Property Disclosure Statement. In a foreclosure, there will be no Property Disclosure Statement and the Schedule A often contains a clause which reads “The purchasers expressly agree that neither the seller nor its agents or representatives have any liability, responsibility, duty or obligation to disclose to the purchasers any information or knowledge that they have with respect to the condition of the lands and premises or any latent or patent defects thereto.”
Sales of foreclosed properties have an increased risk to the buyer, as well as longer wait times for responses to offers and higher deposits.
Buying a foreclosed home at auction
Your highly experienced realtor has done the market research and have discussed the offer you are both comfortable with. Make sure the offer is not too low or it may be rejected by the bank. Your offer is also released to the public. Also, a low offer will encourage more competition. Not advisable!
Make the offer subject to court approval. Both the court and the bank must accept your offer before a court date will be set. Remember, if there are no subjects on your offer - you can't cancel it no matter what. It is imperative that you are present in court and represented by your Realtor if you should need to negotiate. On the court date all offers will be presented to the judge and the highest offer is generally the one accepted. A court order is drafted and the successful candidate will take possession of their foreclosure sale at an agreed upon date.
Timing the Purchase of a Distressed House
The longer a foreclosure sits on the market, the lower the price a bank will accept. Patience can be the key to saving lots of money! The asking price is often adjusted every 30 days to help generate interest in the property.
Your qualified Realtor can help you gain the necessary understanding of your local foreclosure market and help you distinguish the best time to invest in the market.
Although a distressed house comes at a discount, there are some important factors that you will want to consider before investing.
Many foreclosed homes have been damaged by departing owners in the throws of losing their home to foreclosure. Some homes have sat vacant for months or years, leading to serious maintenance issues. It's extremely important that you get a home inspection in order to understand the condition of the home’s structure: cracks in the foundation, condition of the roof, plumbing and electrical, condition of the appliances, hot water heater, gas leaks and furnace.
A Realtor is a must when it comes to buying a distressed home. Their knowledge and advice will help you avoid some of the mistakes made when purchasing a property. The best part is that all of their services are free to the buyer. The seller, in this case the bank, is responsible for all Realtor fees.
Other fees that you as the buyer are not responsible for include: liens against the home, outstanding property taxes and strata fees. These costs will be cleared off the title at the time of the sale.
You are responsible for the property transfer tax, which is taxed at 1% on the first $200,000 and 2% on anything greater than $200,000 up to $2,000,000. After $2,000,000, the property transfer tax is 3%.
As the buyer, you pay the outstanding portion of the mortgage and all legal fees incurred during the process.
Is a foreclosed home a good investment?
A foreclosed home is a great real estate investment if you understand all of the costs associated with the project. A general guideline is that you should never pay more than 70% of the property’s estimated market value. Instead of looking for cheap homes, look for good value in a foreclosure sale.
The high rate of return and the need for rental properties ensures that your real estate investment will generate revenue! Take advantage of the low mortgage rates as well as the ultra-competitive, low vacancy rate. Act now! It's the best time and the right investment!