What to Watch Out for When Buying Foreclosed Real Estate
In 2024, Illinois had one of the highest foreclosure rates in the United States. As a whole, the United States is seeing a rise in foreclosures, though it is nowhere near as bad as the recession of 2008. If you are in the market to buy a home, you might have seen listings for properties that are foreclosed and possibly being sold below market value. However, foreclosures are very different from normal real estate transactions, so it is important to know your risks before moving forward.
Essentially, foreclosure is when someone defaults on their mortgage and the bank ends up repossessing the property. Therefore, when buying a property in foreclosure, the seller is the bank, not an individual. Unlike an individual, who can make certain representations about the property and has knowledge of its ins, outs, and problems, the bank really knows nothing about the physical condition of the property. Therefore, they cannot promise you anything. Your purchase is as-is.
Second, the scope of what as-is means is more than you might think. When you first see the property, certain items of personal property might be there, for example a refrigerator, washer, dryer, oven, etc. When you buy a foreclosure, technically you are not buying those items as-is. Why? Because you’re not buying those items at all. The bank is not conveying personal property to you. If the items are still there when you close, great. If they’re gone, tough. While most banks do not actively remove personal property from a foreclosed home, if it is lost, stolen or repossessed before closing, it’s just gone.
Third, the bank (the seller) is in the business of making loans and doing other normal “bank activities”. This is important to note because the bank is not in the business of repairing or fixing anything that you discovered during inspection. Foreclosed properties are typically sold “as is”, and generally there is no negotiation for repairs. Having said that, I have had a few extreme situations where the bank did provide a large repair credit, but again, those were extreme, very atypical situations.
Fourth, if you have bought a lot of real estate in Illinois, you may expect the Seller to give you a survey at closing. Having a survey is beneficial for several reasons (which could be the subject of a whole other article), but for now what you need to know is that banks typically do not provide a survey. If you want a survey of the property, you will need to fork up the cost of getting one.
Next, there is a possibility you will have to pay a per diem fee if the transaction does not close on time. Most short sales have an addendum which states if the transaction does not close by a certain date (typically the closing date on the contract) then you must pay the bank a fee for each day after that date until you actually close. This per diem fee can be anything from $50 to $100 to $200 or more per day, it just depends on the contract. Therefore while you are under contract, you must be honest with your attorney about whether you are on track to meet this closing date so you can avoid the per diem charge. Sometimes, the bank is willing to waive the per diem if you are open with them about any changes to your financing or how much longer it will take to get your loan fully approved. But if you never ask and your loan is not ready to fund in time, your purchase can become a lot more expensive just because of the per diem fees.
Yet another thing you need to worry about is whether the property you are buying is part of an association. If it is, under Illinois law you could end up owing a lot of back assessments from long before you ever even saw the property. If possible, try to figure out whether or not back assessments are owed before you make an offer, or very early on in the deal when you still have the ability to cancel. I recall a few years back a women reached out to me who bought a condo at a very low price from a foreclosure auction. Afterward, the association tried to collect nearly $30,000 from her in back assessments. She had paid about half of that for the condominium itself, and did not have the money to pay the back assessments. If she had done her research, she would never have bought the condo.
Despite all of this, foreclosures are a great way to get a property at a discount. There might be a lot of potential in the property. It might make a great investment or it might be your next home. Do your research, conduct all necessary inspections, and speak to your attorney about your risks and options. If the numbers make sense, a foreclosure property might be a great fit for you.