The Ethics Of Buying Foreclosures

I was having a discussion with Linda the other day about buying foreclosures and doing it the “right” way. The reason we were chatting about it was because during Financial Peace University I remember Dave talking about how he went and visited homeowners who were about to be foreclosed upon and offered them $10K more than the starting price at the auction.

For example, one homeowner he visited was going to be foreclosed upon 3 days later – the bank was going to be auctioning the property with a starting price of $150K. The homeowners house was appraised at something like $250-$300K – and they were asking a price in that ballpark. But Dave was aware they had 3 days to sell the house or they would be foreclosed upon.

The question I keep asking myself is – is it right?

Morally, it feels a lot different buying a bank-owned property that was foreclosed upon – because the damage is done. The homeowner already lost the house – and getting a deal from a bank (if you can) seems justified.

On one hand you could argue that any options offered to someone about to lose their house is a gesture of kindness – because after all, they can turn down the offer.

But it seems to me that there is a very fine line between using someone’s misfortune for gain and just offering what it’s worth to you at that given moment.

Anyway, my hunch is that every situation is a little different, so there may not be a black & white answer. But either way, what do you think?

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  1. Derek Clark

    I can see what you’re getting it, but I don’t think it is wrong. You may be lowballing your offer, but if their only other other option is foreclosure you are probably doing them a favor. They don’t have to take it, but it could allow them to save their credit. I think most people would welcome as many offers as they can get.

  2. You make a great point Bob. In such extreme cases where one person may benefit heavily from another’s misfortune, Christians must be mindful to treat others as they would wish to be treated themselves.

    I suppose it depends on whether the seller considers the deal appropriate for their situation. Capitalism can be harsh at times, but ultimately when two parties agree to a deal, both parties are proclaiming that they are benefiting each other.

    Again, Christians should be mindful of these types of transactions and ensure that everything is done fairly and prayerfully.

  3. Darren

    I could understand how your conscience would struggle with whether it’s right or wrong.

    But the way I see it, if the house is going to be foreclosed in 3 days, and the starting price at the auction is $150k, you’re offering them $10k more than that starting price. At the day of the auction, people would start bidding at similar prices too.

    I understand that it may seem like a lowball offer, but the house is going to be foreclosed in a few days anyway. And I’m assuming that it’s not your fault that the house is being foreclosed. They’ll receive other offers as well, and they can always turn down your offer.

    So for the most part, my conscience would be ok with giving the lower offer.

  4. Deacon Bradley

    I agree with the above comments too. If you were out to intentionally profit from someone else’s misfortune (ie pay-day loans) that’s unethical. There’s a huge risk to buying that property too. A distressed property is likely under maintained and purchasing it without an inspection is quite a gamble.

  5. Joe Plemon

    You raise a good point Bob, but I tend to agree with the previous comments. The homeowner is in a predicament and making them an offer before the foreclosure takes place could be doing them a favor. This could be a clean sale and save the legal fees that accompany foreclosures. Like the others said, the owner doesn’t have to accept the offer. Or…(although not in a good negotiating position) the owner could make a counter offer. Either way, if both parties agree, I don’t think it is wrong.

  6. j.t.r. hart

    When I recently purchased a short-sale I was reminded of Abraham’s purchase of a field to bury Sarah in (Gen. 23:8-16). He was offered the field for free but insisted on paying what the land was worth. This isn’t a command but certainly a wisdom principle for us.

  7. I agree with Deacon Bradley’s statement!

  8. Mike D.

    It’s a gamble for both parties. Dave, or anyone else trying to buy the house, is trying to buy the house ahead of time thinking it may go for more at auction. The homeowner is taking the deal thinking it may not.

    There’s a differnece between offering and pressuring too. Pressuring someone to take the money would be wrong, but there’s nothing wrong with making a simple offer. If the homeowners think they can find a better deal it’s their choice to hold off.

  9. Lynn

    Who knows, the bank may not even approve the sale. It would have to approve a short sale and that process is not quick so it probably would go to auction before anything was approved anyway.

    Also, keep in mind that when all is said and done, Dave Ramsey is a businessman. While I like what he does, it does irk me that he charges a lot of money to go to his seminars and for all his materials. He’s out to make a buck like everyone else.

  10. Derek Clark

    Why is Dave not allowed to make money at what he does? Lots of people buy his materials and go to his seminars so apparently he is charging a fair market value for the services he provides. Isn’t that how capitalism works? Is he supposed to make less money because he is a Christian?

  11. I agree with what others have said. As long as you are not the cause of the foreclosure, there is nothing wrong with making an offer. Though I’ve heard from other people that it can be an emotional ordeal.

    The seller is not being coerced into accepting your offer. Whereas before, foreclosure many have been the only option, it presents another option and allows them to make a choice.

    • Bob

      Good comments everyone – it is great to hear your thoughts on this!

  12. Making Change

    Buying a foreclosure from a bank many times means paying full price for a distressed home. Buying a pre-foreclosure from a property owner could mean a great discount for the buyer and a credit salvage for the seller. In the case of the Dave Ramsey comment, usually the bidding starts right around the amount owed on the property. In that case the previous owner can pay off the original loan and walk away with $10,000. This is a much better option than walking away with a foreclosure, ruined credit and possibly having to pay the bank money anyways. I think that the moral question would come with the new buyer after the purchase. This could truly be a blessing, if they could not have otherwise afforded the house. In the case of an investor or someone who finds a great deal, they are being good stewards of their money and this will free up more down the road to be able to give to God’s kingdom. Keep it in the right perspective and look at your motives and how they affect everyone involved.

  13. david jay

    I am conflicted on this issue. To me, the real issue is that a family’s home is being taken away. This house will then often be bought by a speculator who will either rent it out or flip it. The whole process seems wrong. The banks in many cases are unwilling to help the troubled home owner, but will take a lower price from the speculator, so the issue isn’t profit or loss. The issue becomes the morality of the bank, the speculator and those who continue to allow this situation. Rather than help the home owner, you are helping the bank when you try to low ball the purchase. Seems very unchristian to me.

  14. Derek Clark

    @david jay
    The family’s home is being taken away because they couldn’t pay for it. This is not the bank, Dave or anybody else’s fault. The buyer is offering a way out for the homeowner who didn’t keep up his end of the bargain for whatever reason salvaging their credit. What part of this is unchristian?

  15. david jay

    Why and how did the home buyer fail? That is the important part of the equation.

    Personally, I was laid off for several months through no fault of my own. My bank (BofA) absolutely made no effort to work with me to help salvage my credit. I wanted to ask them for forbearance. I couldn’t ever get in contact with anyone at the bank with any interest in discussing what efforts could be made to save my house. They would let me live there for free for a year, but weren’t concerned with helping me make up the arrears. I finally filed chapter 13, solely to save my house.

    That is what is unchristian.

    This appears to be a coordinated effort on the part of the banks to ease out homeowners in favor of speculators.

    That is my opinion based on my personal experience and the experiences of a few thousand other people who I have had contact with about the conduct of the banks. Failure to accept partial payments, refusal to talk with borrowers, allowing (almost requesting) borrowers to get thousands in arrears, these are all issues for those that are behind.

    For those that are current, but underwater there is another very similar set of issues, but the primary issue is that we are dealing with the money changers at the temple and their tables need to be overturned.

  16. Carol Fred

    I think one has some further questions to find answers to before you ask the question if purchasing a forclosed home is ethical. Like, what got the homeowner into this problem. The world is full of choices and we make them as we see fit. Was the homeowner unrealistic when purchasing, did someone tell them a fairy story about making big bucks on a ‘flip’? Purchasing a foreclosed home is no different than purchasing anything else. You pay the least amount for it possible. It is not for me to decide ethics when purchasing anything that is for sale.

  17. Derek Clark

    “They would let me live there for free for a year, but weren’t concerned with helping me make up the arrears.”

    I’m sorry you have had some hard times and lost your job. I recently had several family members lose jobs and it is hard. That being said what do you want the bank to do? They let you go a year without paying anything. That seems pretty generous to me. Should they just give you the house and forget about the contract you signed?

    Banks aren’t making money on foreclosures. That is where they lose money. They would much prefer for us to stay in the house and keep paying them.

  18. Mark

    There’s a story I’ve heard – A king lived on a mountaintop and he needed a driver for his carriage. He talked to several people about the job. One person said, “Your majesty, I am so talented that I can drive within a foot of the edge of the winding path to your castle without going over the edge.” Another potential driver said, “Your majesty, my skills are so great that I can drive within six inches of the edge of the winding path to your castle without fear.” Another said, “Your majesty, I far surpass all others. I can drive within an inch of the edge of the winding path to your castle without fear of going over the edge.” The last man came before the king, and said, “Your majesty, I have driven carriages for many years and I will do the best job I can for you.” The king asked him, “Sir, how close can you drive to the edge of the winding path to my castle without fear of falling off?” The man replied, “I have no idea, your majesty, for I stay as far from the edge as possible.” Who do you think the king hired?

    I think we, as Christians, take pains to imitate the world, driving as close to the edge as possible. I heard Larry Burkett, years ago, answer a similar question with much wisdom. He responded that we have a different standard than the world. He said that, as believers, we are to give people a fair market price, even if it doesn’t make sense to the world. What’s ultimately more important, being a witness for Christ or getting some property at a great price? Think about it – who has the greater witness – a person who does things differently, that the world can’t identify with, or one who does the same things that the world would do?

    Thank God for your conscience, Bob. “So I always take pains to have a clear conscience toward both God and man.” -Acts 24:16

  19. Gholmes

    Getting a deal on a property is no issue in my book. Market value for property is not appraisals but what buyers are willing to pay.

    Isnt the issue, using debt as a tool? As Christians & PF enthusisast we should examine how much debt (if any) is reasonable. In recent U.S. history financing the “American Dream” with 30 year, 40 year, variable rates and even intrest only loans was smart move because your house was such a “sure” thing. The prevelant thinking in the U.S. was that real estate prices could only go up or at worse stay flat. In the U.S. I think it was our pride that allowed us to buy into this financing schemes that were out there.

  20. Derek Clark

    As to the quote from Larry, how do you determine fair market price. Nobody has offered them any more money, if they did they would have already sold it to them. If the buyer agrees then whatever the offer is, is the fair market price. You aren’t going to go to Florida or Las Vegas or California and pay the price that the person bought the house for in 2006. That would be silly and wasteful.

    I am all for giving generously. Help as many people as you can as much as you can. We are talking about a purchase though, not charity. Things are only worth what somebody else is willing to pay for them. If you are the only person willing to buy that house, it is only worth what you offered. That is fair market price. You don’t go to an auction and then say hey that was too good of a deal here’s another 50 thousand. If you are the best offer, then your offer is the market price.

  21. david jay

    I think you misunderstood my post. I didn’t live free for a year. I didn’t want to live free. I wanted to pay my arrears, but couldn’t do it all at once. The bank wouldn’t allow me to make it up over time. They would allow me to live there for free, but they wouldn’t accept my payments. I had to file chapter 13 to get a stay to prevent foreclosure and to allow me to pay my debt.

    I other words, the bank would not allow me to pay my debt. They wanted to foreclose on the house. This is what is totally wrong.

    Yes, it is not their fault that my employer lost their government contract and laid everyone off.

    If they had been willing to work with me, they would have their arrears in hand, but now they must wait and will get it over a period of several months, a little bit at a time.

    My answer originally was trying to say there are moral and ethical issues on all sides of the question. There is no simple answer. But I do believe that he who profits from others misery will pay in the future.

  22. david jay

    Servicing banks make money from foreclosure. They do not own the debt. That is a common misconception. BofA makes as much or more from a foreclosure as they do from someone who pays. That is why they don’t care on loans they are servicing. They get their cut off the top on an auction or short sale. So I wouldn’t be repeating that tall tale about how they don’t profit from a foreclosure. The important clause here is servicing bank.

  23. Derek Clark

    True the servicing bank makes money, but that bank that owns the loan loses money. Many times that is the same bank, sometimes not. Note the banks lost Billions of dollars in 2008 because of this.

    I don’t have a high opinion of BofA so I can’t argue much there. I can see how you could be upset with them.

    Back to the original point though, if somebody offered you slightly more than you owed to save you from foreclosure and bankruptcy, how is that wrong? You are free to say no if you think it is worth more, but it seems that they are offering a way out. Also, if it was worth a bunch more then somebody else should be willing to pay more. They plan on making a profit, but that doesn’t make them evil. Contrary to popular belief making money is not evil.

  24. Carol Schultz-Weil

    In times past a foreclosure was often the result of a personal tragedy brought on within the context of a basically conservative system of living. The home owner stood to lose high levels of equity in the process. Hence the moral dilemma of whether to take advantage of their misfortune.
    The current housing crisis is much different in that many of the homeowners were overextended, the banks made predatory loans, many homeowners had minimum down and little equity, and many purchases were made on speculation. Homes were once considered a lifetime purchase and now the average home-ownership is five years which barely makes a dent in paying down the principle. Yes, there is still those who lost their homes due to tragic circumstances but far less than in the past.
    As Christians I believe that we should continue to support programs and voice our concern and insist that the banks work with homeowners on loan modifications and similar programs but if a home is foreclosed view the purchase as part of the recovery plan. My heart grieves for all who have lost their homes but we can all come out of this better than when we started.

  25. Steph

    @David Jay – I have heard the same story from lots of people. I would feel a moral conflict if this was available to me. I know the reasoning on both sides, and I agree with a previous comment that it would be important to me to have the cause of the borrower’s dilemma. In David’s case, I might be inclined to make offer but too many folks bought homes way above their ability to pay with “stated income” and low initial interest rates. Then the rates changed & their income did not – should I enable their decision? I really would not feel comfortable making this offer (even more so than when I started replying). As my grandma used to say, “when in doubt, don’t”. I understand the issues as all have stated but the discomfort I feel in my spirit would keep me from doing this. That is just me though – not judging anyone else at all.

  26. MD

    Well I was all set to agree with the others that it was ok as long as the seller was not pressured or manipulated to accept the offer; however, after reading Mark’s comment (Mark May 12, 2010 at 12:59 pm), I have to rethink my position. But in the scenario described above, the seller may get to walk away with some money since the offer was for $10k more than what was owed.

  27. Billy

    Well, I read the previous 28 comments and my emotions went back and forth. I feel that if the seller gets more than what they owe the bank then it could be a win-win situation. If they get less than what they owe then the bank would have to approve and that would probably not work out. But, if the bank agreed and the seller could walk away not owing any more and not go through foreclosure, I think that could be a good thing for all involved. I do agree there are ethical issues with the back processing of loans to foreclosure but I do not think that was the question asked in this post.

  28. Greg

    I think it depends on the situation. Right now there are many who are losing their homes due to the general problems of the economic recession/depression we are experiencing. I have more than one neighbor who were new neighbors in the neighborhood. They weren’t bad people, not necessarily friendly, but newer neighbors, perhaps working poor in a sense. They bought all the things other bought, had all the vices or good works that others did. And some of them simply lost their job or income through no fault of their own. They either walked away or lost their house outright or are losing them to foreclosure. Some lose their house when a job is lost, or when a divorce happens. These are all a variety of perhaps “public sins” that is sins toward the individual by the state that doesn’t protect their jobs from competition or put money back into our country, instead padding their own rich friends nest, or those bailing out the banks, to keep the system going, but giving hundreds of billions of dollars to liars, cheats and others who got rich quick with CDO schemes and over-appraisals. The entire country, from appraisers, to bankers, to real estate agents, were all greedy, and they all for the most part, bought into a lie of unlimited growth, but there was not engine to drive unlimited growth. Meanwhile for years, good jobs that are high paying have been shinking. So these all brought the general ill on the nation.

    Now there’s a big difference between buying the house of someone who is kicked out if it because of hard luck and a speculator or liar’s house. And everyone is friendly to their neighbor, but looks the other way when tough times happen, and expect their extended family to help. Some bought or overbought, because they were told, “your going to go places, you’re a poor minority, or your on the roll for some special government program”, and we’ll give you an ARM and you can have this big new $200,000 house, just because you are poor and even though your job and math doesn’t make sense, we’ll give you a ballon ARM. These people were lied to and the banks and lenders took advantage of them, because they were poor and dumb and greedy. And they deserve little mercy in a sense, because they were greedy and just bought a lie, now they get to wake up from the market. Please understand I’m not saying all minorities or poor are to blame. Then there are those who were working and could pay their debts and weren’t trying to live over their means. They bought houses that were modest and high priced. They were buying in an up market. They had no choice, practically except to buy because it was that or “live with their parents” or “rent a small apartment”. So they may have had a family and bought a place, and paid their bills. And they may have some extremes but not much, cable, a new car, etc. Then they lose their job. And because our “representatives” didn’t give a damn about this country but cared more for the profit or world traders and slave labor markets in China and the big buck to be made, the government destroyed the middle class.

    Now a neighbor who spent $85,000 on a house near me, I don’t really know him, but he has a family. And his house is on the market as a short sale for $35,000. So I’m supposed to go in and say, yeah I’ll take that house and your equity and save the bank and kick you out. Because that’s just the way it is, and that’s what the misworking and messed up economy can offer you right now. So I’ll profit off his pain, and call it a “Christian thing” because “in God we Trust” is written on the money we save? I don’t think so.

    I’ve heard people who seemed to be very ordinary talking about this not being able to keep going on. I’m secure in my job, don’t get me wrong, but a lot of people I’ve overheard have said, “there’s a revolution” coming. It scares me, because this will likely push people over the edge. I’m amazed that so many go quietly and perhaps with a work ethic just fade away living with a relative or in some cheap rental. Others take glee in the “great deals” and “God will bless me” attitude. I don’t think it’s Christian to take advantage of other people’s pain and make a profit off it.

    I’ve thought about buying the Short sale house this guy lives in and offering it to him for rent. Then he’d stay there, and when he’s back on his feet, he’ll get to buy it back from me for the equity I have in it and refinance it when his credit is repaired. This would allow him to survive in the house, give me a decent neighbor perhaps, and I wouldn’t be taking advantage of him. But the typical capitalistic answer is buy it low and wait and hope for recovery and sell it high.

    But no recovery is coming. It’s all lies. The house of cards will continue to fall as we build up India and China and pay more for diminishing raw materials resources and make the super rich elitists, richer. The government doesn’t seem to comprehend or work for the people but maintains the status quo and tries to keep the same tax flow coming in for services from a crippled economy.

    I see nothing good in all this. We know that the foreclosure prices will drive the market price for the next several years. Immigration and Mexicans will continue to migrate freely into this country and repopulate. America is changing. Both parties have been lying to us as a matter of business as usual and there’s nothing we can do about it. Alternate parties are jokes and don’t have answers either.

    So we’ll see low prices and little profit from real estate for some years to come. Eventually governments will fail as people will decide to not pay taxes or a revolt may happen. Why, because they can’t foreclose on everyone. And people will get sick of all this. The best thing that could happen is government to cut back on all it’s expenses right now, but we’ll go the way of the painful lying and retaining the old way, method.

    We will end up with house prices being low and perhaps the best a “Christian” can do, would be to buy a low priced house that is driven down in price due to the low market. But I don’t think buying a house from a laid off person who had it foreclosed is “Christian”, it’s more like selling you’re soul for half equity in a house.

  29. Veryoldman

    The ethics question balances on Capitalism vs Vultures. Win-win negotiations vs oppressive manipulation. Dave’s methods do not violate any ethics issues since it is an offer to be accepted or refused. If there is no potential for profit, why would the buyer be interested?? If there is no potential for debt relief, why would the seller be interested?? Once the bank takes control there are no negotiable options for the seller and of course we know full well the ethics levels of banks.

  30. Steph

    As an addition to my blog comment a while back, I want to direct you all to information that is essential if you are considering buying a foreclosed home. Please see which describes the problems of original notes and deeds of trust going missing. If you decide to buy a foreclosed home, be sure you have some legal advice and tread carefully. You may be buying a home that is really not foreclosed or foreclosed fraudulently.