Dumb Money Move No. 10: Buy a home in foreclosure

Daniel Solin — Sat, 09 Aug 2008 08:30:00 EST

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

Is there a silver lining in the horrific number of home foreclosures we read about every day?

While having a home foreclosed must be traumatic for the homeowner, does it present an opportunity for investors and potential home buyers to pick up a bargain?

The answer may depend on the nature of the sale.

The classic scenario is the auction, where a home is literally auctioned off to the highest bidder, often right on the lawn in front of the house.

The basic problem with buying a home at auction is that you have no right to inspect the home and you have to pay the full purchase price by cash or bank check on the spot. There have been situations where buyers found serious problems with homes purchased in this manner, which would have been uncovered by a competent home inspector. Also, while not common, the homeowner may refuse to vacate the house. If so, you may be confronted with delays and significant legal fees to evict him.

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$8.6 billion in foreclosed homes weigh down bank balance sheets

Peter Cohan — Wed, 23 Jul 2008 10:48:00 EST

Filed under: Federal Natl Mtge (FNM), Economic Data, Recession

Bloomberg News reports that the 8,500 banks and S&Ls in the U.S. hold $8.56 billion worth of foreclosed homes on their balance sheets. And most of those $6.9 billion, are held by two companies -- Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). They hold 81% of the foreclosed properties but 50% of the mortgages -- more evidence that Fannie and Freddie financed far more bad loans than their standards should have permitted.

This inventory of foreclosed homes weighs down the entire housing market. Generally, such homes sell for a 20% discount -- and that's not good for the prices in the neighborhood. Bloomberg reports that the prices received for foreclosed properties have declined -- from 93% in 2005 to 74% of the unpaid mortgage principal. Moreover, unless the bank pays to cut the grass and otherwise maintain the foreclosed home, its poor curb appeal taints the neighborhood a bit for potential buyers.

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