With interest rates and home prices increasing, I have had several of my investors ask me a question that, until the few months ago, I was not asked very often: Should we buy foreclosures? In a healthy market, like the market here in the Atlanta Metro area (at least at the time of writing this post), I find it hard to recommend going this route. Let's explore (the non-sugarcoated) "Whys" below.
While we may hear that the sky is falling on the national news, that is simply not the case in the Atlanta Metro area. The national real estate market is nowhere near equivalent to the Atlanta real estate market. To say the least, Atlanta had not caught up to other major US cities, in terms of home prices, until we saw the boom in 2020 due to historically low interest rates and other economic and workforce factors unique to Atlanta. You can see from the First Multiple Listing Service ("FMLS") graph below that the average home price has continued to increase despite the media claiming the "the sky falling".
This is due in part to the decreased supply (see the FMLS graph after this paragraph) and the desirability of the area. Without going into a lengthy discussion of supply and demand, when supply is low and the demand is high, prices increase. Now we are here with low supply, high demand, and increased home prices.
Experts in real estate, the mortgage industry, and economics agree that there will not be a "bubble" like we saw in 2008/2009 (the "Crash"). The industry is regulated significantly more and banks and lending institutions cannot (legally) go down the same path that led us to the Crash. Prices will always fluctuate because that is normal. Outside of a catastrophic economic event, we can remove the idea of a "crash" from the discussion.
"But banks want to recover what they are owed and get rid of the house. We can buy homes for pennies on the dollar." This is only partly true...and not the "pennies on the dollar" part. Yes, they do want to recover what they are owed, but since the market is healthy they want to recover more than is what owed. Why? Because banks, like sellers and investors, are in the business of making as much money as possible. Homes in the Crash of yesteryear sold for less because the market was flooded with homes (supply outweighed demand) and the purchasing power of people was diminished. People now have significantly more equity in their homes and are able to pay higher prices. Simply put: homes will not sell for "pennies on the dollar" because the buyers are paying significantly more than pennies on the dollar.
To be competitive when buying a foreclosure home, cash is king. Unless you have liquid cash, you are facing an uphill battle. Do you plan on going up against all cash-buyers at the courthouse foreclosure auctions when you need a loan to purchase the property? That will not be easy. The foreclosure homes that are worth buying will be bought in cash in this market and cash trumps a loan. I have not met many buyers, especially people who need/are looking for homes at a discount, that have the available liquid cash to go up against professional home investors. It's not impossible, but it is difficult and there is a low success rate across the board.
If you have the cash and want to win (and you certainly can!), you need to know you are buying the home as-is. As-is means the property owner is selling the home in its current condition, and is unwilling make repairs or improvements before the sale (or negotiate any credits to fund repairs). As you can guess, the term "as-is" is rarely, if ever, attributed to the description of a home that is in immaculate or move-in ready condition.
Let's talk more about condition. When it comes to a foreclosure, the home is now owned by a bank and the bank will have little to no idea what condition the home is in or defects the home has, but needs to sell it. The bank will most likely not provide a property disclosure or perform an inspection to inform you of any defects. Like an investor owned home, the owner has never lived in the home and will not have any knowledge of its condition. The unknown condition(s), coupled with purchasing with straight cash, can be risky unless you have the ability to make substantial repairs or withstand a loss. This is because, when buying with cash, there are no "minimum property requirements" that are put in place to help protect the buyer (a/k/a YOU) like when using FHA, USDA, VA, and Conventional loans. While the minimum property requirements vary depending on the type of loan, some of the requirements include (but are not limited to):
A structurally sound foundation
Clean drinking water
A roof that prevents moisture from entering the home
Functioning heat and air
If there is a defect that is found after the home is purchased, there is generally no recourse for the buyer. The buyer will be responsible for all the repairs. If possible, get an inspection. I would never recommend buying a home without an inspection by an inspector of your choice.
As one can imagine, the last thing on a person's mind when they are losing their home is that they need to maintain and pour more money (money they didn't have to keep the home in the first place) into the home they are about to lose. Many homes that are going into foreclosure suffer from neglect and disrepair (as well as intentional damage - we have seen cement poured into toilets and copper wiring stripped from homes). There is no telling what the person did (or did not do) to the home in the months following up to the home being taken by the bank. On top of that, the bank will not turn on utilities for a buyer to verify all the home systems are working as intended. You can bet on the home requiring repairs to make it ready to sell or rent for top-dollar. By the time the property is rentable or ready for resale, it will have cost nearly the same as buying a home that is not in foreclosure.
The next and final question to ask oneself is: why would I want to invest in a home that has so many unknowns when I could buy a home that has been well maintained? Below is a real chart of a home listed for sale that is in foreclosure in comparison to two homes that have sold and one that is currently marked as hold. Notice anything about the prices? The foreclosure home is only 7% below the sold price of the homes that closed that were not in foreclosure and the exact same price as the home that is listed as hold and not in foreclosure. To get a solid investment and minimize risk, we look at getting fixer-upper homes for our investors that are 20-30% below the comparables in the neighborhood because it allows for both renovations and and profit (if reselling).
While some may believe that buying foreclosures is a good way to get a deal on a home, that is not necessarily the case in a healthy real estate market. Atlanta is still a desirable market and has low supply and high demand, leading to continued increases in home prices, which includes foreclosures. For this reason, homes will not sell for pennies on the dollar, as banks can recover more than what is remaining on the mortgage. Cash is king when buying foreclosure homes, and buyers should be prepared to purchase the home as-is, with little knowledge of the home's condition or defects which can lead to costly surprises. These are all factors that one needs to take into consideration when looking at purchasing a foreclosure home versus the typical resale home.
If you are looking at listing, buying, or investing, or would like a consultation regarding your specific real estate needs, please send me a message or give me a call! I would love to help you achieve your real estate goals.
Graham Witt - Real Estate Consultant Realtor with Keller Williams Atlanta Partners c: 847-507-7126 o: 678-341-2900 e: GrahamWitt@KW.com
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