New warnings for buyers rushing to scoop up foreclosed homes. Why these cheap deals may be too good to be true
Foreclosure rates are surging across the US, with thousands of homeowners finding themselves in crisis and unable to pay off their home.
But foreclosure, when a bank reclaims a home after missed mortgage payments, doesn't just cost homeowners their properties. It can also leave lasting damage to communities and the broader economy by dragging down neighborhood property values and increasing vacancy rates.
Experts say there are various reasons homeowners get foreclosed on, and the reasons can also vary by location. If a giant local employer goes bust, for example, a city can see a massive amount of foreclosures at once.
Rates can also rise if crime surges in a neighborhood, if a natural disaster hits, or in the event of divorce, death or medical bills piling up.
It can also happen if a first time buyer does not realize the cost of owning a home extends beyond just the mortgage payments. There are bills, upkeep, maintenance fees, and home insurance to pay.
According to a report by real estate data company ATTOM, there were 101,513 US properties with foreclosure filings in July through September — up 17 percent compared to the same time last year.
Among the worst hit cities were Cleveland, Ohio, Columbia, South Carolina, Bakersfield, California, Las Vegas, Nevada, and Lakeland, Cape Coral, Ocala and Jacksonville in Florida.
Some investors see foreclosure filings as an opportunity to snap up a deal. But when is it a chance to buy a cut-price home, and when might it turn into a costly trap?
Foreclosure rates are surging across the country, with thousands of homeowners finding themselves unable to pay off their home
Why foreclosures are happening
Job loss, excessive debt, or a substantial pay cut can lead to a homeowner becoming unable to make mortgage payments.
In the US, medical expenses from a major illness or injury can also wipe out savings, or the legal costs around divorce or separation can also deplete bank accounts.
For many, the death of a spouse or partner who contributed to or fully paid the mortgage may affect the surviving homeowner.
Adjustable-rate mortgages (ARMs) are also a big reason for foreclosures.
These mortgages start with a low, introductory interest rate that a few years later resets to a higher, unaffordable rate. ARMs were a big factor in the 2008 foreclosure crisis.
Widespread recessions and boomtown busts also lead to an increase in foreclosure rates. Detroit, Michigan, experienced a foreclosure crisis following the 2008 economic recession and the bankruptcy of General Motors in 2009.
Rising property taxes and insurance premiums, especially in disaster-prone areas, can also make homeownership unaffordable and trigger a lapse in payments.
Job loss, excessive debt, or a substantial pay cut can lead to a homeowner becoming unable to make mortgage payments (Pictured: An abandoned house in Oklahoma)
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Getting a 'deal'
While the idea of picking up a foreclosed home at a rock-bottom price can be alluring, experts warn that it's not for the inexperienced.
Torry McJunkins, a realtor who has lived and worked in the Cleveland area for more than 30 years, knows the process inside and out — and she's sounding the alarm for would-be buyers.
The 2008 financial crisis and the predatory lending practices associated with subprime mortgages started a wave of foreclosures in Cleveland. Now, the manufacturing industry has cut jobs there, and the city still hasn't recovered.
'I have purchased and helped clients purchase homes that were a foreclosure and I almost never advise an individual take it upon themselves,' McJunkins told the Daily Mail.
While the price may be cheap, there's a catch — and it's a big one.
'The issue is that when it comes to homes that are in foreclosure, a buyer is not able to tour the home before they buy it. They're not able to do a home inspection and they can't even step foot inside', she said.
Homes that are in foreclosure are often sold at public in-person auctions.
'Once you're the winning bidder you have to follow the terms of the auction.
'Typically it's a cash purchase and you may have to make around a 10 percent good faith deposit before leaving the auction that day.'
And if you change you mind, you are not getting that money back.
Failing to meet the sale terms can also result in stiff penalties, particularly in Cuyahoga County, Ohio, where McJunkins says she has the most experience.
Torry McJunkins is a realtor who has lived and worked in the Cleveland area for more than 30 years and specializes in selling foreclosed homes
Cleveland residents have suffered from the decline of its manufacturing sector, which has increased unemployment and poverty in the city
Cleveland, Ohio, was among the US cities with the highest number of foreclosures in August this year
Beware first-time buyers
Individual buyers, take note.
'If you do not own a construction company, you are taking an unnecessary risk in buying a foreclosed home,' McJunkins said.
'When families were losing their homes — their biggest asset — during the 2008 crisis, many were stripping the houses, selling light fixtures, kitchen cabinets, furnaces, air conditioning.
'You could be walking into a house you just paid $200,000 for that might not actually be in livable condition.
'I most certainly would not want to be a first-time homebuyer doing this.'
With many of Cleveland's homes dating back to the late 1800s and early 1900s, some are solid.
Many others, though, are riddled with issues like outdated electrical systems, deteriorating roofs, flooded basements, or even lack of insurance eligibility due to old fuse boxes or outdated wiring.
'Paying potentially hundreds of thousands of dollars for a home without having any information about the condition and then having to have the financial resources to make that home habitable, that's potentially very costly,' she said.
Experts warn individual buyers that a foreclosed home may not be in livable condition and could be riddled with issues
Buyers interested in buying a foreclosed home are encouraged to work specifically with foreclosure realtors who specialize in navigating these sales
Know what you're buying
There are three primary types of foreclosure purchases.
Pre-foreclosures: These are off-market deals where homeowners are motivated to sell below market value to avoid foreclosure. This requires negotiation and an expert realtor.
Search for 'foreclosure specialist' or 'foreclosure realtor' with your location to find agents who make these sales.
The National Association of Realtors (NAR) also provides resources for finding these agents.
The second type is auction homes.
These are sold as-is, sight unseen, often requiring full cash payment. These are high risk, high reward, but are very risky for amateurs.
The third is REO (Real estate owned) properties.
These are homes that did not sell at auction and are now listed by banks. These allow for inspections and financing, making them more accessible for regular buyers.
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Real estate agent Jeff Lichtenstein, CEO of Echo Fine Properties in Florida
Buyers are encouraged to work specifically with foreclosure realtors — licensed professionals who specialize in navigating these complex transactions.
They can also assist sellers facing foreclosure, helping them manage the sale of the property to limit damage.
Florida realtor Jeff Lichtenstein said he gets approached often to find a client a foreclosed home.
'I have people who call and they say I want to buy a foreclosure. I say, "How about I can find you a great home that fits your needs at an under market price?"' he said.
'Too many people go in and think that foreclosures are the only good deals and often times they are not.
'Homes that have been foreclosed on are usually homes that are beaten up and have no views.'
Community impact
Some cities offer incentives for buying a home that has bee foreclosed on.
In Cleveland, there is a potential upside for developers who commit to quality renovations.
'When they do a full gut-to-the-studs renovation, and don't do a cheap job, that home now qualifies for a 15-year reduction in property taxes from the city,' McJunkins said.
But not every investor has good intentions, she warned.
'I've seen contractors buy two or three, do a half-finished renovation, then run out of cash,' McJunkins said.
'Or worse, they slap on cheap carpeting, paint everything gray, put in the lowest-end kitchen fixtures, and skip the mechanicals, the roof, the windows.
'They're not helping anyone. Those projects aren't contributing to the overall neighborhood.'
Many times, contractors do a half-finished renovation and then run out of cash, leaving the house to rot on its own and bringing down neighborhood values
Only very experienced flippers or developers should be buying foreclosed homes, then increasing their value with high-end materials in order to resell
Some developers, McJunkins warned, live in lovely high-end suburbs and come into the city of Cleveland hoping to buy and flip houses quickly and cheaply.
'Sometimes they look down on the area as less than where they live, so they don't think they have to do as good of a job,' she said.
She advises to only buy a foreclosed home that has been flipped by a reputable developer, and that your real estate agent should know who they are.
'I have hundreds and hundreds of sales in the neighborhoods where I live and work every day. If I'm going to put my face on it, they have to be doing it right and pulling permits,' she said.
Beware of crime ridden areas
According to a study done by the National Institute of Justice, foreclosed properties that sit for a long time attract drug dealers, gang members, sex workers, squatters and copper thieves.
The NIJ has called for a 'push for coordination between local law enforcement, courts and housing agencies to identify properties entering foreclosure, so they can be monitored.'
Be patient
Foreclosures may offer opportunity, but only for those with the expertise, cash, and grit to handle the unexpected. And there is always something unexpected.
'I tell people if you're an experienced developer and working with a seasoned agent who knows the property values in the community, there can be a substantial upside,' McJunkins said.
'You may buy a house for $150,000, but it may require $100,000 or more to go into it to complete a full gut renovation.
'Once you do that, you're into the house for $250,000 or $300,000, and then you're hoping to resell somewhere in the $400,000 to $500,000 range.
'But you need to be tracking all of those costs throughout the entire project. It's not a game.'
Experts warn that properties that sit empty for a long time can attract crime, including drug dealing and squatters
Patience is needed when buying a foreclosure and clients have to really understand the money and work that you have to put into it
Bottom line: Don't do it unless you know what you're doing
'If you insist on buying a foreclosure, I think that you have to really understand the money that you have to put into it and if it is a good buy or not,' Lichtenstein said.
'Sometimes they can be, but it requires a lot of work. The other thing is you have to make sure that the title is secure so research with a good real estate attorney is a must.'
He added that homes have sometimes not been taken care of for long periods of time, which makes purchases risky.
For McJunkins, it is better to just wait for a regular listing which suits your needs.
'I always, always tell clients never buy a foreclosed home. The only ones who should are developers who do it for a living and know what they are doing.'
