It seems that every headline we read these days screams out that foreclosures are on the rise.  This is true in many parts of the United States…Los Angeles, California among them.

Now it’s true that while we don’t have many foreclosures happening in the Santa Monica real estate market, I am nevertheless asked by my clients at least weekly to find them a foreclosed home.  This made me think that perhaps a quick definition of foreclosure along with some pros and cons when searching for these homes, could really benefit our RealEstate-SantaMonica.com readers and clients.

What is a foreclosure?

First up let’s explain what a foreclosure actually is.  Foreclosure is the process by which the mortgagee (usually a lender) takes back the home from the mortgagor (the homeowner). 

The foreclosure process begins when the homeowner fails to make payments of the money due on the mortgage at the appointed time.  This may be due to several reasons like unemployment and medical challenges.  The other big reason for the growing number of foreclosures is that the adjustable rate mortgages (ARM’s) are resetting to higher interest rates.  Many of these loans had short-term low-interest rates, known as teaser rates to entice the consumer to take the loan.  And now that the teaser period is over, the interest rates on the loans has jumped up accordingly.

Foreclosure proceedings typically start with a formal demand for payment which is usually a letter issued from the lender. This letter of notice is referred to as a Notice of Default (NOD). Depending on the state, the lender will typically issue this notice when the homeowner has been 3 months delinquent on the mortgage payments.

If the homeowner doesn’t bring the mortgage current, the lender has the right to foreclose and take the home back.  The home will most likely be auctioned off with the proceeds kept so that the lender can recover its investment.   This is the foreclosure process in a nutshell.

So the next question is…should you buy a foreclosure?  Well maybe…or maybe not.

The Pros of Buying a Foreclosed Home

Low Prices. 

Foreclosure sometimes sell for 20-50% below their true market values.  More modest discounts of 5-10% are the norm, but foreclosures are almost always priced lower than homes in the traditional real estate market.

Great Fixer Uppers. 

Many foreclosed homes need serious tlc…tender loving care.  They can be a great opportunity for the savvy investor to buy and fix up for profit.

Lower Closing Costs. 

The banks and government agencies that sell foreclosed homes usually just when them sold as quickly as possible.  Many times they are often willing to accept lower offers on down payments, and will help with closing costs so that the new buyer doesn’t have to come up with as much initial cash.

Flexible Financing.

Many times when banks sell foreclosed properties they are willing to offer better-than-average financing terms to sweeten the deal and get the property sold.

The Cons of Buying a Foreclosed Home

Liens and Liabilities.

Foreclosed properties may have liens from unpaid taxes or liabilities from the property title.  These hassles can increase the red-tape burden and can be expensive to correct.  A little research into the property before you buy it, is a wise way to go!

Former Homeowners.

Sadly there are times when the former homeowners are either in denial that the home is no longer theirs, or they just refuse to vacate.  This situation can be difficult for the new homeowner to deal with.  Again, this is where research comes in…not to mention the services of RealEstate-SantaMonica.com.

Property Condition

Many foreclosed properties are in a state of neglect and disrepair.  The new owner should definitely pay for a physical inspection to make sure there are no serious surprises like leaky roofs, cracked foundations, etc.  And I always tell people that sometimes…if you don’t have a lot of cash on hand…it’s better to pay a little bit more for a home in good condition so that the expense is amortized across a 30 year mortgage, rather than paying less for a house and having to put tens of thousands of dollars into the home’s repairs to bring it back up to par.

Well now that you know a little bit more about foreclosures, happy house hunting!  And be sure to remember that RealEstate-SantaMonica.com is here to help you.