Considering buying a foreclosed home? The potential to find a great deal on a significantly discounted property is appealing. Buying a foreclosure could yield major financial rewards, but it’s crucial to remember there are substantial risks to weigh as well. Keep reading for specifics, including pros, cons, and tips for purchasing a home in foreclosure, so you can determine if it’s the right choice for you.
What are your options?
Let’s define what a foreclosure entails. Lenders seize homes when homeowners fail to keep up with payments, subsequently putting these homes up for sale. As a buyer, purchasing a foreclosed home differs from buying one owned by an individual homeowner, and several options exist within the foreclosure market:
- Short sale: Also known as pre-foreclosure, this occurs when a property’s value has declined, prompting the homeowner to sell for less than the outstanding mortgage balance. You’ll need to work through the seller’s real estate agent, not directly with the homeowner.
- Auction: Foreclosure auctions, held both live and online, allow properties to go to the highest bidder. While you might secure a home below market value, beware of potential title issues, unpaid liens, and property taxes becoming your responsibility. These homes are typically sold as-is, without a chance for inspection or appraisal, and may require cash payment depending on local laws. Additionally, the highest bidder might need to meet an upset price set by a court in judicial foreclosure.
- Purchase from the lender: Properties not sold at auction become bank-owned (REO) and are easier to purchase since the lender handles title and lien issues. Banks often prefer quick closings. However, direct dealings with the lender are uncommon, so working with a real estate professional is advisable if interested. connect with a real estate professional
Lower prices.
Foreclosed homes usually sell at a low price verses other comparable properties. Lenders don’t want to pay for the costs of upkeep and taxes to maintain the property for too long because they begin to lose money; this makes them more willing to offer prices below the market rate. Also, many homes that go into foreclosure come at different price points, meaning you could purchase anything from a starter home to a mansion.
Negotiation Opportunities:
Lenders, highly motivated to clear foreclosed properties from their books, often entertain negotiations. Their willingness to accept below-market offers aligns with potential price reductions.
Quick Closing:
Motivated to sell swiftly, lenders facilitate quick closings, offering advantageous timelines for buyers.
Potential:
Are you handy and see potential in fixer-uppers? Buying a foreclosure allows you to customize or transform it into an investment property. Some foreclosed homes require minimal repairs, offering substantial return on investment if market values exceed purchase prices.
Additional Costs and Financial Risks:
Buying a foreclosed home can lead to unexpected expenses like back taxes, liens, and legal fees for eviction. Potential debts associated with the property could outweigh anticipated benefits.
Poor Condition:
Foreclosed homes are typically sold as-is, potentially requiring significant repairs due to neglect. Issues like plumbing problems, mold, and structural damage may necessitate costly renovations.
Competition.
For a quality foreclosed property, you will be competing with many potential buyers due to increased demand and buyer interests. Also, investors find foreclosed properties appealing because they often want to rent or flip them for a profit. And banks often find investors’ offers more appealing because they can pay all cash, so if you’re in the market for a foreclosure, you may have competition.
If you’ve decided that the pros outweigh the cons, then it’s time to take action.
Here are some tips for buying a foreclosed home.
Work with an Experienced Real Estate Agent
Speaking of competition, you’ll get a leg up on the competition if you work with a real estate agent. The foreclosure market is a niche market, so you want someone who has experience with the foreclosure process. Since most lenders work directly with REO agents, who then partner with standard real estate agents, make sure your agent has those type of connections. You may also want to hire a real estate attorney if the foreclosed property is inhabited by owner occupants who need to be evicted.
Work with an Experienced Mortgage Lender
Consider your finances and monthly income as you begin the process and get preapproved before you make an offer. This ensures you know how much funding you will have and helps you negotiate. AmeriSave offers a pre-qualification that allows for closing in as few as 25 days, as well as a unique Certified Approval process that gives borrowers credit approval in three minutes based on a soft credit pull that doesn’t affect credit scores but lets you lock into a low mortgage rate. An AmeriSave mortgage banker can help you with both while also helping you avoid common real estate scams, including those related to foreclosures.
Find Foreclosed Homes for Sale
Your real estate agent can help with your search, but you may want to take advantage of other foreclosure resources as well. You can find foreclosure listings via online searches, as there are specialty websites, including those that government agencies may have foreclosed on. In particular, the Department of Housing and Urban Development (HUD) comes into foreclosure properties every day as the result of mortgage defaults. If you’re interested in HUD homes, which can have lower closing costs and down payment requirements, a HUD-approved real estate broker can submit a bid for you.
Get an Appraisal and Inspection
Don’t skip out on the home appraisal or home inspection. The former lets you and the lender know how much the home is worth. (Keep in mind that a lower home appraisal can affect your ability to obtain a loan, so if this is a potential issue, you may be better to pay cash to avoid a low appraisal.) An inspection is a more intensive look at the property, and while it’s not required, it’s critical to ensure the foundation, roof, electrical system and everything in between (inside and out) are in working order. The American Society of Home Inspectors website can help homebuyers find a professional inspector.
Hopefully the foreclosure process is clearer to you now and you can appreciate that while foreclosures can be great deals, there are also a number of risks. While the decision is ultimately up to you, AmeriSave’s experienced mortgage bankers can help you navigate the foreclosure process and are here to guide you to a home loan program that’s right for you.
