- I knew buying a foreclosure would come with some headaches, but didn't expect the extra expenses.
- I had to give a higher offer, escrow extra funds, and even put the utilities in my name before completing the purchase.
- Despite the unexpected expenses, buying a foreclosure was still a great deal.
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"This looks promising," I told my husband as we pulled into a dirt driveway. The home looked like a witch's cabin in the listing photos, complete with a large, half-dead crab apple tree looming ominously over the property. My husband and I, along with our realtor, only stopped by because the house that we were in town to see had ceilings so low that my husband kept hitting his head. "Might as well have a look," we told the agent.
After a quick stroll through the house, I could tell we were on the same page. We progressed from thinking the house was promising, to interesting, to telling our agent that we were very interested. We drew up the offer right there in the driveway.
We were trying to buy in a desirable school district on a shoestring budget. We also wanted a house that we could put sweat equity into, so many of the homes we had looked at were foreclosures. We were prepared for the extra headaches of buying a foreclosure, but we didn't realize how many hidden expenses we would encounter before we even got the keys.
Expense #1: A higher offer
With a foreclosure, there's no personal or emotional attachment from the seller — the bank is just looking for the highest number that will clear a file off their desk. Rather than playing slick by tossing a low-ball offer, our real estate agent told us to come in immediately with our "best and final" number.
The home was listed for $162,000, with most houses nearby selling for under the asking price. We knew we really didn't want to miss out on this house, so we had to ask ourselves what that was worth. We initially settled on $165,000, but increasing our odds of getting the house was worth a $5,000 gamble. So, we submitted an offer of $170,000, an amount we felt should beat out the competition.
It took about 10 days for a bank to say yes. We waited with bated breath. After a few days, our realtor told us that other offers had been declined, and eventually we heard that ours was accepted. Luckily, it worked out, because if not we would have wasted a week's time while the spring market heated, pushing prices up around us.
Expense #2: Extra escrow
Because our home had been empty for years, the utilities had been turned off. Everyone could see that the pipes had frozen, but there was no way to see how bad the damage was without turning on the water. This unknown was a risk we were willing to take, since my husband has some plumbing background. But our bank couldn't finance the house without knowing that there was working water — that the home was livable.
At first, the real estate agent told us we would have to pay to have the water turned on, which would cost a few hundred dollars. But the bank that was selling the house wouldn't allow that because they didn't want the liability of water damage that might occur. Instead, we had to escrow extra funds to prove to our lender that we could repair the pipes even if they all had to be replaced: an extra $5,000 we had to put into the bank.
Once we moved in, we spent about half of that on fixing the pipes. When a licensed plumber signed off on the work, our mortgage holder released the rest of the funds to us. It was more of an inconvenience then a true expense, but if we hadn't had the cash on hand it could have been a deal breaker.
Expense #3: Utility turn-on
Just like the water, we had to pay to have the electric reconnected. Before we owned the house, I owned the electric account that was attached, which cost about $175 to get up and running.
Expense #4: Inspection and testing
When you're buying a foreclosure, a home inspection is just for your peace of mind. We knew that the bank selling the house wasn't going to fix anything. Despite that, we wanted to go in eyes wide open, so we paid $800 for a thorough home inspection. Luckily, it didn't turn up any surprises, but rather than seeing the money as wasted, we saw it as the cost of intel on the purchase we were making.
Expense #5: Radon mitigation system
The inspection included testing for radon, a toxic gas that can accumulate in the basement. The levels in our house were dangerously high, and required professional mitigation. This issue isn't unique to buying a foreclosure, but if we were doing a traditional purchase we could have asked the sellers to cover some or all of the cost. Instead, we had to write a $1,200 check before closing so that the system could be put in place as soon as we had the keys.
Purchasing a foreclosure left us with lots of extra costs, not to mention stress, before closing. Despite that, it was a great financial move. From the day we moved in, our home was valued at about $30,000 more than we had paid. That meant higher tax bills, but also that we had equity from day one. The foreclosure might have come with some headaches and extra expenses, but it also helped solidify our financial foundation for the future.
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