Is There Such a Thing as Buying a Safe Foreclosure?

This is a guest post by Global Finance School’s Aaron Huber.

In a recent article that appeared on CNBCIs It Safe to Buy a Foreclosure?” the following advice was offered:

It’s safe to buy a previously foreclosed-upon house if title insurance is available on it, experts say….As long as the new lender and new owner have title insurance, the former owner can’t seize the home back. The new owner will keep the house, and the displaced former owner might be compensated with money.

This story was a real wake up call for me on just how far the housing market has fallen, even from other past post-bubble lows.

Back in 2007–2008, buying a foreclosure was something savvy buyers would look into in order to get a decent house at a heavily discounted price. Buyers at that time essentially had two options – buy a house from a previous owner or buy a bank-owned property.

Flash forward to 2010 and you’ll be hard pressed to find any home buyers who are looking at non-bank owned properties. The main reason for this that foreclosed properties have almost completely saturated the market.

Consider the following figure from RealtyTrac: In the US, one out of every 389 US households with a mortgage is in foreclosure. In the most troubled states such as California and Florida (which also contain a high percentage of our nation’s housing stock), the rate shoots up to one in every 79 homes.

With this in mind the article from CNBC should have been titled “How to Stay Safe When you buy a Foreclosure”, because if you buy a home, chances are it will be a foreclosure.

The crux of the CNBC article touched on the scary trend of new owners being sued by former owners who were given the boot by their bank without proper due diligence and legal procedures being followed. The huge “robo-signing” scandal may only be the tip of the iceberg. We’ll see the rest after Congress gets finished grilling mortgage industry and banking executives on what went wrong with their internal procedures.

Title insurance, as the excerpt above states, is probably the best solution to this problem. I have another solution: Don’t buy a house.

The real estate market is still a basket case. If you prefer not to get dragged down in complicated legal proceedings, you should simply look into renting.

I know, many people still claim that renting is throwing your money down the drain, but no matter how dysfunctional the housing market becomes – just when you think we can’t hit a new low, there it comes and takes everyone by surprise.

If you’re intent on purchasing a new house, you owe it to yourself to at least wait until the congressional hearings on the mortgage industry have reached some sort of conclusion. There are a lot of lawyers in the US and they are all salivating about being able to bring lawsuits surrounding the hundreds of thousands of foreclosures filed in the US since the beginning of the financial crisis. I’ll be sitting this one out on the sidelines from my rented apartment. Won’t you join me?

About the Author: Aaron Huber is a staff writer for Global Finance School. Global Finance School is a leader in producing interactive e-learning courses on finance, accounting, and economics.