A recent survey of American adults by Trulia.com and RealtyTrac found that almost everyone believes foreclosed properties offer deep discounts, as well as giant repair bills -- and many assume they are very risky deals, as well.
Trulia's consumer advocate, Tara-Nicholle Nelson, tells WalletPop that's not necessarily the case. But, she warns, "Like everything in real estate, risk and reward are proportional: the big potential reward comes with big risks."
Nelson set the record straight on the 10 most common myths based on the survey and her own experience with bank-owned properties as a San Francisco Bay Area real estate broker.
Myth #1: Foreclosures need a huge amount of work. In all, 92% of respondents said they would be prepared to do significant work on a foreclosed home. Yet, despite memorable news stories about homes stripped to the studs, many foreclosures need little more than the standard spruce up duo of many a home: paint and carpet.
Myth #2: Foreclosures sell at massive discounts, compared to other homes. More than a third of respondents expected to receive a discount of 50% or more. Nelson says that bank foreclosures may be discounted as little as 10%, in part because they owe it to their investors. "Banks, in my experience, do not take super low-ball offers," she says.
Myth #3: Buying a foreclosure is risky, according to 49% of respondents. This may be true for those sold at the courthouse or in other venues, but Nelson points out that most people will be buying bank-owned properties. "Buying a home, period, involves risk, for sure, but would I say buying a foreclosed home involves more risk? Not usually," she says. "By the time they're bank owned, the bank really has sanitized the title" so that no lingering debts or other hidden costs can pop up later.
Myth #4: You can't get inspections on a foreclosed property. While county auctions may preclude inspections, virtually all bank-owned foreclosures allow them, in part to avoid future liability claims.
Myth #5: There are hidden costs to watch out for, according to more than two-thirds of those who sensed a negative stigma to buying foreclosures. This is where Nelson's mantra, that foreclosures are "not a monolith," is particularly key. Auctions can include buyer's premiums and hefty fees, but bank-owned properties offered by a real estate agent likely carry the same closing costs as any other house purchase.
Myth #6: Foreclosures are more likely to lose their value than "regular" homes, said 35% of those who saw some negatives in buying foreclosures. Instead, the discounts on foreclosures may offer a bit of "insulation from further depreciation.
Myth #7: Most foreclosures happen when homeowners just walk away. In fact, most occur when the owners' financial situation changes or the loan adjusts, Nelson says.
Myth #8: When you buy a foreclosure, you should low ball the bank, which is desperate to get these homes off its books.
Instead, many "would rather lower the list price in bite-sized increments and see what kind of new traffic is attracted once they lower it, Nelson says.
Myth #9: You need to be able to pay in cash in order to buy a foreclosure. Once again, for county auctions, you may need a cashier's check, but bank-owned foreclosures typically can be bought with regular mortgages, although there are exceptions for properties in bad enough condition to worry lenders.
Myth #10: If you have bad credit, it's easier to get financing from the bank that owns the property. Though banks do offer incentives like lower fees or closing cost credits for buyers who use their bank for their mortgage, they aren't likely to bend their qualification rules. "Think about it," Nelson writes in her blog, "why would the bank want to end up with the same property as a foreclosure, again?"
10 myths about buying a foreclosed home