John Kelly
(651) 238-5649

Buying Foreclosed Homes


I get a fairly steady stream of buyers wanting to purchase foreclosed properties in St. Paul and other communities in the Twin Cities. Of course what they really want to do is buy a property at a reduced price. Foreclosed properties are listed in the Twin Cities MLS along with everything else that is for sale. So I usually try to convince my buyers to look for properties that offer the best value, and to consider all properties.

In addition to bank owned properties that are already in foreclosure, there are other properties that are in pre-foreclosure, and today's St. Paul area real estate market has plenty of other motivated sellers who are willing to unload their properties at attractive prices. I know from experience that foreclosed properties have issues that some of my buyers are not going to want to deal with, so I try hard to get them to keep all of their options open.

After I convince my buyers to consider all properties, it is still very likely that some of the lowest priced real estate will be in foreclosure. So I have to prepare my buyers for the fact that buying bank owned property is very different than buying other property. It is true that banks are very motivated to sell, but they often don't act the way other motivated sellers act. To begin with, motivated sellers typically respond quickly to written offers--banks typically do not. It is not uncommon to submit an offer and then have to wait a week or more to hear anything at all. It is important to prepare buyers for this fact, because some buyers are not in a position to wait that long. I have several investors who are willing to submit offers and then wait on the banks response. But most of my buyers who are looking for a house to live in have a pretty short window of time to work with. They know when they need to take possession of their new home. So when they submit an offer, they want to hear something pretty quick. When they don't, they're likely to go deal with a seller who will respond to them on a timely basis. It's really sad that the banks are doing such a poor job responding to offers. They are missing out on many buyers who would probably be willing to pay more than an investor would.

The time delay is really because banks are not set up to be in the business of acquiring and selling real estate. Banks, especially out of state banks, have never been good at managing residential real estate. And in this market they are overwhelmed with the number of properties they have, and they are getting more all the time. This means that there are going to be some good deals for savvy buyers. But because the banks are so unprepared to deal with this number of foreclosures, they are going to be exceptionally difficult to deal with. Buyers need to find a professional buyer broker to represent their interests as they negotiate the process of buying a foreclosed home in the St. Paul area.

In addition to the slow response time, bank owned properties create many other challenges for buyers. I have always counseled my buyers to write offers that are contingent on a  professional home inspection. This is important even with properties that appear to be in good shape. Knowing as much as possible about what you're buying is even more important when considering foreclosed properties. The problem is that some banks won't look at offers that are contingent on anything other than financing. Even banks that will consider offers that are contingent on an inspection prefer the certainty of offers that do not include an inspection contingency.  In a multiple offer situation, I have several investors who write offers that are not contingent on inspections.  These investors know that some of the other offers are likely to be from buyers who are willing to purchase the home without an inspection, and they are concerned that adding an inspection addendum might make their offer less attractive to the bank.

The inspection contingency is only one of the common contingencies that are used in Minnesota real estate contracts. What all of the other contingencies have in common, is that the banks won't look at any of them. I have a buyer who has absolutely fallen in love with a home that is in foreclosure. But she has a home she would have to sell. She would be thrilled to write a full price offer contingent on the sale of her home, but the bank won't even look at a contingent offer. I usually try to have my clients get their homes sold, and then they are in a position to write non contingent offers. Of course everybody prefers non contingent offers. But my client is reluctant to accept an offer on her home, and then submit an offer on the foreclosed home, knowing that she's unlikely to hear anything for 2 or 3 weeks. The banks are making it really difficult for move up buyers to buy foreclosed homes. They won't accept contingent offers, but they won't respond quickly to people who sell their homes and write non contingent offers.

From a legal standpoint, the biggest problem with buying foreclosed properties is that some of the out of state banks are acting like they don't have to follow Minnesota's real estate laws. We have pretty strict laws on disclosure, but many banks are simply refusing to comply with the law and provide disclosure statements. Also, Minneapolis, St. Paul, and many of our suburbs have truth in housing laws requiring written inspections to be available when buyers look at properties. I can't count the number of foreclosed properties I have visited that are not in compliance.

Minneapolis and St. Paul are taking strict measures to make sure that foreclosed homes are properly taken care of. From a buyer's perspective the most problematic measure involves placing work orders, and code compliance orders on vacant homes. Yesterday I was looking at a property in St. Paul with one of my best investors. He is somebody who takes pride in fixing up properties the right way. His motto is that he doesn't want to rent out anything he wouldn't live in himself. This particular property has a lot going for it, but the work orders require things to be done that I would never need to have done before living in the home myself. It was really the work orders that kept my client from purchasing the property. This is an investor who does most of the work himself. I kept thinking that if he couldn't buy the property, satisfy the work orders, and still make the numbers work then nobody is going to be able to. Both cities are considering plans to make it more difficult and expensive for investors to buy foreclosed homes and then rent them out. Remember the banks are making it inconvenient for individuals to sell their own homes and buy foreclosed homes. Now we have the cities making it hard for investors. Who is going to buy all of these homes?

There is something worse than missing an opportunity to buy a property because the city is requiring excessive work orders. A number of people have purchased properties in Minneapolis and St. Paul only to find out about the required work orders after they take possession. Remember the banks aren't always disclosing things the way they are supposed to. So now they own a property that they are not allowed to rent, and they can only sell it to somebody who is willing to assume the burden of the work orders.

I hope I haven't made the idea of buying foreclosed properties sound too frightening. It is working very well for a number of my clients, and there are a lot of good deals available. In fact some of the difficulties I have discussed help ensure that there will not be enough buyers for all of the foreclosed properties and that there will continue to be good deals for buyers. If you are interested in buying foreclosed properties, please get an experienced buyer broker on your team.

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