Buying a Short Sale, REO, or Foreclosure: Most Common Mistakes

Purchasing a distressed property is a great way to purchase a larger home for money and pick up some instant potential equity.  However, there are many mistakes that buyers of foreclosure properties make that can can leave you feeling like you’ve bitten off more than you bargained for.

Mistake 1: Buying a Foreclosed Home at the top of your price range.

Doing this causes two problems.  First, the selling bank will not typically perform repairs needed to make the house habitable.  If your budget is wiped clean by closing costs, you may start off life in your new house deep in credit card debt bringing the home up to acceptable standards.  The second problem deals with the property taxes.  Depending on how property taxes are handled in your locality, the property taxes may be based on the actual market value of the property, not your extremely low purchase price.  Here in Chattanooga Area, property taxes are based on a tax appraisal, which is typically 10 -15% less than market value.  The issue comes when at the next reassessment, the tax value increases so dramatically that the home becomes unaffordable.

Mistake 2: Not having the home inspected.

While the bank usually will not do any repairs, this doesn’t mean that you should not perform at least the basic battery of inspections.  Often the power, gas, and water are not on. Some Chattanooga area utility companies allow buyers to have the utilities turned on for just a single day.  However, some Chattanooga area utility companies only allow the owner of the property to have utilities turned on.  Just like a typical transaction, you need to know what you’re buying.  Plus, you never know what has been stolen in the home like the copper tubing, electrical lines, exterior a/c units, etc.

Mistake 3: No money in reserves.

Depending on the person who lived there before, there may be hidden suprises as soon as you fire up the appliances and systems for the first time.  While everything can be repaired, you'll need some cash reserves.  Depending on the price of the home, an extra $5,000 can be a real lifesaver.  Also, consider purchasing a home warranty for just those unexpected breakdowns.  Just make sure that the warranty doesn’t have some silly REO property (foreclosure)  exclusion clause.

Mistake 4: Moving in too quickly. 

Don’t show up to closing with the moving truck outside the building.  Give yourself a week or so to make repairs, change the locks, paint and clean thoroughly.