Hey Ted!

Should I buy

a foreclosure?

Are you one of the many people captivated by the idea of purchasing a foreclosed property in Chicago? It's a popular choice these days, but do you truly understand what it entails? Fortunately, you've stumbled upon the right place! As someone who works in the industry, I deal with foreclosures on a daily basis and can shed some light on the matter.

What is a foreclosure?

To begin, let's clarify what exactly a foreclosure is. A foreclosed property refers to a "distressed property" that the bank has taken ownership of and is eager to sell swiftly. Banks aren't aiming to maximize profits from these properties; instead, they prefer to price them aggressively to quickly remove them from their books and move on to the next opportunity. Naturally, this presents a great chance for buyers to acquire a property below market value. Sounds enticing, doesn't it? However, there are a few factors to consider.

When a bank finally gains possession of a foreclosed home, it often means that the property has been vacant for a significant period. From the moment the owner missed their 3-4th payment until the bank took official possession, a minimum of 13 months has passed. Note that this is the absolute minimum, and due to the number of foreclosures these days, some properties can remain vacant and neglected for as long as 18-24 months or even longer! In essence, for two years, these homes could have been left abandoned and uncared for.

So, what does this imply for potential buyers? The answer lies in understanding who the client is and why they are purchasing the property. Let's examine two different buyer scenarios and how their unique circumstances shape the situation.

Investors

Once the 15-day period elapses without an accepted offer, the opportunity opens up to all buyers, including investors, who can then submit their offers. The current market presents an appealing landscape for real estate investors due to several factors:

In the realm of foreclosure properties, there exists a strong inclination towards "flipping." It's an attractive proposition: acquire a run-down home at a bargain price, renovate it, and then sell it for a profit. It sounds too good to be true, right?

This mindset is prevalent among many investors, and if it weren't for the involvement of Fannie Mae and Freddie Mac, they would likely dominate the foreclosure market. However, these days, Fannie Mae and Freddie Mac impose certain restrictions on their foreclosure sales. During the first 15 days, a home is on the market, only buyers intending to live in the property are allowed to submit offers. These institutions aim to encourage homeownership and prefer to sell the homes within this initial period to individuals who will occupy and take care of them. However, this isn't always the case.

A strong market means high resell prices, so finding an inexpensive “buy” is attractive.
Inventory levels are high as cautious buyers remain uncertain about their financial situations and the overall economy.
Today's buyers often desire move-in-ready homes that leave them in awe.

Let's consider a basic example of what an investor typically does. They identify a foreclosed home available at a significantly lower price than its market value. They then engage reliable tradespeople who can efficiently rehabilitate the property. Finally, they sell the property close to market value, generating a profit in the process.

One advantage that investors possess over regular buyers lies in the financing aspect. For instance, imagine a foreclosed home listed at price X. Suppose there are two offers on the table: an investor offering 90% of X with the ability to close within two weeks, and a first-time buyer offering 95% of X but requiring the standard 30-45 days to close due to securing a mortgage. In most cases, the bank will accept the cash offer and proceed with it. Banks seek to minimize risk and exit the situation as swiftly as possible.

Owner Occupant &
First-Time Homebuyers

Here are a few examples of what may have occurred during the abandonment:

For those who have never owned a home before, the allure of a foreclosure property can seem like the perfect opportunity. While there are certainly some decent properties available to suit every need, it's essential to recognize that it may not always be the best option.

First-time buyers, in particular, tend to prefer move-in-ready homes. This generation of buyers, influenced by Insta, Pinterest, and home improvement shows, desires a finished and attractive living space. Many buyers are willing to spend more to have a home that requires minimal work, rather than saving money but having to invest time and effort into renovations. There's absolutely nothing wrong with this mindset; it's simply a reflection of the preferences of today's buyers, who are willing to pay for convenience.

With that said, it's important to acknowledge that most foreclosure properties require varying degrees of work, and some may need substantial renovations. As mentioned earlier, some banks take as long as 18-24 months to acquire and sell foreclosed homes. This means that the property you are looking at today may have been abandoned for two years or even longer.

During this time, the harsh Chicago weather can take its toll, and the property may have suffered neglect in various aspects

The lack of heating in winter and cooling in summer may have caused damage to the home.
The roof may not have received proper maintenance, leading to visible shingle erosion.
The plumbing may have deteriorated, with pipes becoming rusted or corroded.
The electrical and gas systems may not have been used, potentially affecting the functionality of HVAC and water heaters.
Water damage to the basement, roof, and walls may have started without any intervention.
Windows could be broken, and vandalism may have occurred.

Of course, numerous other issues could have arisen over the span of two years. However, for an investor, these concerns may not matter as they plan to renovate the property entirely and make it visually appealing. On the other hand, most first-time buyers do not want to face the challenges involved in making a home habitable again.

However, there are exceptions. Some "handy" first-time buyers can see the value in a foreclosure property and don't mind undertaking upgrades. It ultimately boils down to the type of buyer you are. Are you willing to put in the work, or would you prefer to have it done for you? If you prefer to avoid renovations, a foreclosure may not be the right choice for you. Considering the market conditions in recent years, there are many non-foreclosure options available within your price range. It's important not to automatically focus solely on foreclosures due to their prices. As the old saying goes, "You get what you pay for." Just exercise caution before diving in.

I strive to educate my clients so they can have realistic expectations before viewing homes. Every situation is unique, and while some clients have found satisfaction in purchasing foreclosed homes, others have realized after the sale that the property wasn't what they had initially envisioned.

To sum it up, I encourage you to have a chat with me. Engaging in a conversation will ensure we are on the same page and allow us to develop an effective plan going forward. Understanding how I can assist you in finding your ideal home is the key to success.

With the current market conditions, it's an excellent time to buy, and I sincerely hope you will allow me to be a part of your journey toward homeownership. I have been in the industry since 2004 and have gained extensive knowledge of the real estate landscape and all it entails.

Buying a home is a significant investment, and it's crucial not to navigate the process alone. Feel free to explore my "Buying a Home Guide," which provides valuable insights and walks you through the entire buying process. Thank you for taking the time to read through this information. I look forward to the opportunity to assist you and help make your homeownership dreams a reality.

- Ted