I get asked a lot, “what about foreclosures, can we buy one?” While the pricing seems rather tempting, let the inventory alone, foreclosures aren’t that simple for an average buyer.
SO, WHAT IS A FORECLOSURE?
A foreclosure is a process by which a bank, a mortgage company, or other lien holders seeks to take a property from an owner to satisfy a debt. Unfortunate life circumstances can cause someone to fall behind on mortgage payments. The bank or lender may take ownership of the property or have the property sold to pay off the debt. The owner loses all the rights to the property and all the investment they’ve put into it. It can also leave an ugly mark on the owner’s credit report. If you’re thinking to buy one of these properties, understand that if you’re dealing with the previous owner, emotions can run high.
If you are purchasing a pre-foreclosure home you’ll have to bring the homeowner up to current payments to avoid going into foreclosure. This can be tricky in beating out the timeline, dealing with emotional owners and getting your financing together. It’s much easier done when you have full cash to do the deal. A lot of times, these homeowners are not only behind in their mortgage payment, but also with utilities and taxes – which get filed as liens against the property – all costs you have to get up to speed when you transfer ownership.
The biggest selling point of a foreclosed home is, of course, their marked down price – often significantly lower from other similar properties out the same area. Once the property is in Foreclosure or short-sale stage, the owners are financially bound and time is not on their side. They have to unload the property and get what they can while they can, or else they will lose it entirely. It may seem cruel to take advantage of other’s misfortune, while buyers can benefit.
Foreclosed homes are usually sold “as is’ – if there’s damage, repairs the owners aren’t part of any conversation anymore.
RISKS OF BUYING FORECLOSED HOMES
Though the below-market price is the big plus of buying a foreclosed home, these properties also have their fair share of pitfalls.
Buying a property as-is can be pretty grim especially if the home is still occupied by the owners. It can be poorly maintained – after all if the owners can’t make the mortgage payments they are likely falling behind on paying for regular upkeep, repairs, and maintenance. Some folks who are facing or forced into foreclosure can be bitter and sometimes they take their frustrations on their homes before the bank repossesses. This involves removing appliances, fixtures, and vandalism.
Along with the unforeseen repairs and renovation work, expect to see delinquencies such as bank taxes and liens. Together with these, you may also expect a slow process with the purchase and paperwork. Foreclosures will have additional documents that have to be completed to prepare for the closing, and in the real world, they’re not so often timely.
You have to get approval from different offices, such as lenders, banks, and other third-party parties involved with the sale.
Not to mention the competition once the word gets out. Numerous offers can come in rapidly, and a bidding wars start. If you can pay for the property and necessary renovations in cash, you’re in an enviable position.
If you’re looking at it from the surface, foreclosed homes can seem very appealing; however, costs can be highly unpredictable, and underlying damages could make the property undesirable. The buying process is often sluggish and risky. You might get the lowest deal for a property but the long-term acquisition, process, and maintenance maybe not worth it.
Purchasing a foreclosure isn’t for everyone, and most people won’t gamble with their peace of mind and a smooth transaction when it comes to buying their first forever home. A traditional sale may not be as enticing as a foreclosed home, but it will make sense in the long term.