When is the best time to buy a home?
That’s been one of the most consistent questions listeners have asked on the Clark Howard Podcast since the end of 2021. At the time, COVID-19, supply chain issues, historically low interest rates and the beginnings of an inflationary cycle conspired to create a frenzy in the home-buying market.
Since then, interest rates — and therefore mortgage rates — have gotten much, much more expensive.
The brief period of time, when you needed to make an all-cash offer above the asking price to secure the best houses in the hottest markets, is over. There’s been a bit of a supply gridlock as well.
Those who secured mortgage rates below 4% — sometimes well below — during the prolonged time period of near-zero interest rates from the Fed are reluctant to move (and potentially face much more expensive rates).
The supply chain issues have cleared. But it has taken time for new construction to get back in sync with market demand.
Many Americans simply haven’t been able to afford home prices that remain elevated and are waiting on their income to catch up to prices that may stagnate or move sideways for some time.
One podcast listener wondered if buying a home out of foreclosure may be the solution to his desire to be a homeowner.
Can I Buy a Home Out of Foreclosure and Feel Good About It?
How risky is it to buy a home out of foreclosure?
That’s what a listener asked on the Aug. 14 podcast episode.
Asked Gary in Virginia: “My wife and I have been renting for the last 5 years while trying to save up for a home purchase. With high interest rates and housing prices, we’ve struggled tremendously to find anything that is workable, in the right area, and within our budget.
“Recently a foreclosure auction was announced on a house that we’ve been keeping an eye on. We are good friends with the builder, are sure that it was well-built and feel pretty confident that the house would be a pretty good fit for us.
“We know it has more risk buying this way, and would bid accordingly. Curious if Clark thinks buying a foreclosure is an OK move for this first-time home-buyer?”
As if there was any doubt. Remember, this is the man who lives to save more and spend less.
“Buying foreclosures can be a great move for any home buyer. And I have bought several foreclosures over my lifetime,” Clark says.
“Right now, if a house is in foreclosure, likely it’s a people-problem house. Somebody could’ve died. It could be in a protracted, ugly divorce. Somebody may have relocated somewhere else and they’re having trouble.
“There’s a backstory why that house is in foreclosure. Not that there’s anything wrong with the house. Just there are problems involved with the owner. And so going for a foreclosure could be absolutely a great way to buy.”
Potential Problems With Buying a Foreclosed Home
Foreclosed homes often sell at lower prices with smaller down payments or lower interest rates.
You’d think that a bank or lender who has reclaimed a home would be incentivized to sell it again as soon as possible. But sometimes these financial institutions drag their feet in terms of considering offers or finalizing the escrow process.
These homes often are in below-average or even rough shape due to a tough combination: a lack of money by the previous owner(s) and sitting vacant for weeks, months or even years.
If a homeowner could no longer afford the mortgage, who’s to say what else he or she couldn’t afford while living inside the house? Also, leaving a home vacant for a long period of time can cause some less-than-desirable issues.
If at all possible, get a home inspection. Or make your offer contingent on a home inspection before the sale closes.
Home Foreclosures: Listing Potential Issues
A bargain can quickly turn into a stress-filled money pit if you don’t know what you’re getting into. Some potential issues:
- Vandalism. Foreclosed homes often sit abandoned. Thieves can smash windows, deface the property, steal appliances and other things. Sometimes an angry previous owner can, out of spite, deliberately damage a home headed for foreclosure.
- Structural issues. If a previous owner couldn’t afford the mortgage, he or she may not have been able to afford normal upkeep either. You could face water or mold damage or a home that’s in violation of local codes.
- Dirty. In some cases, the home could still contain trash, clothes and other items from the previous owner. It can also smell or be especially dirty if it sits for an extended period of time without any air circulating through it.
- Unfinished work. It’s possible that a previous owner abandoned a renovation or couldn’t finish a project they started in the house.
- Lack of seller disclosures. No one from the bank has lived in this house. So you won’t get any of the usual disclosures from the seller about potential issues.
- Potentially limited financing options. Some lenders may decide not to offer a mortgage on some foreclosed homes.
- Buying “as is.” If you’re buying a foreclosed home in an auction, you won’t get to inspect or even step foot inside the home before you bid. (Not all foreclosed homes sell in an auction.)
Keep in mind that none of these issues may exist. It’s just a good idea to be aware of the possibilities. And to go into the home-buying process with your eyes open and a healthy dose of skepticism.
Buying a home out of foreclosure can get you into a neighborhood or house that you couldn’t otherwise afford.
Clark has purchased several foreclosed homes. He thinks it can be a great way to score a bargain.
Just make sure you do your homework. You’ll want to understand the risks and get as much information about the home as you can before you make an offer.