Thinking Of Buying A Foreclosed Home? Here’s What You Need To Know.
Have you been viewing property after property without any luck? Perhaps you were unable to find one that felt right in the neighborhood you’re interested in? Or maybe the properties you’ve seen in the area are simply out of your budget?
If this sounds familiar, you may want to look into foreclosures.
Sure, buying a foreclosed home is not without its risks. But it could also be incredibly worthwhile. If you’re careful and you do your homework, you could snag yourself a real bargain.
Here’s what you need to keep in mind if you’re considering making an offer on a foreclosure.
Know The Difference: Pre-Foreclosure, Foreclosure At Auction Or Bank-Owned?
Typically, a foreclosed home will be in one of the following stages: pre-foreclosure, foreclosure at auction or bank-owned. Understanding the difference between these three stages is crucial, because each stage warrants its own specific considerations.
Homes in pre-foreclosure are still in the homeowner’s hands. The homeowner will have just defaulted on their mortgage, so the foreclosure is still pending.
Sellers with homes in pre-foreclosure are usually in a hurry to sell before the bank takes possession of the property. This puts you in an advantageous position in negotiations. However, the seller’s mortgage lender will want to review your offer and approve it, which can be a frustrating process.
Foreclosure at auction
Here, the home has been foreclosed and is being auctioned off to the highest bidder. The auction starts at a set amount based on how much is still outstanding on the mortgage plus interest and other charges.
Buying at auction is risky, because you’re making an offer without having had the opportunity to look over the property thoroughly. You’ll also be bidding against other buyers, which isn’t always the most advantageous position to be in.
If a house doesn’t sell at auction, the bank purchases the property, which then becomes real estate owned (REO).
The bank will want to unload an REO as quickly as possible, which puts you at an advantage. However, depending on circumstances, the property may have been uninhabited for a long period of time, which means it may have suffered vandalism or developed other issues that might need expensive repairs.
Disadvantages of Buying A Foreclosed Home
Okay, so let’s start with the downsides first.
When you buy a foreclosure, you have to take it in as-is condition. At best, this will mean the home needs some cleaning and the odd spot of maintenance. At worst, you may be in for expensive repairs, even to the structure of the home itself.
As a rule of thumb, homes in pre-foreclosure are usually in better condition than an REO, because they were recently inhabited. With that being said, the fact that the owners couldn’t afford the mortgage repayments might mean they also couldn’t afford the upkeep.
Carrying out an inspection before you put in an offer isn’t advisable, because you might end up out of pocket if your offer isn’t accepted. If, however, you’re particularly concerned about the state of the home, you can try making a lower bid or otherwise making your offer contingent on a home inspection.
Buying a foreclosure also comes with additional red tape. Waiting for weeks just to get an answer about your offer isn’t unheard of. Some lenders may also have an issue with foreclosed properties, which may limit your options or force you to look into alternative ways of financing your purchase.
Advantages of Buying A Foreclosed Home
While foreclosed homes do have significant disadvantages, there’s also an upside.
The most obvious advantage is the return on investment. You can usually buy a foreclosed home for less than you’d pay for it on the open market. This means you may be able to buy a lot more house than you could otherwise afford, or get into a more prestigious neighborhood. You could also be in for huge gains if you put the property on the market a few years down the line.
What’s more, the seller is usually in a hurry to unload the property. This not only puts you in an advantageous negotiating position, but also means closing is quite fast. Once all the paperwork is in order, you can usually expect to close within 30 days of escrow.
If you’re considering buying a foreclosed home, keeping a cool head is really important. Make sure you weigh the pros and cons carefully before making an offer. Don’t let yourself get carried away by the excitement of making a sweet deal or by pressure from the seller to close quickly.
Most importantly, always listen to your real estate agent, as they have the experience and know-how to get you the best possible deal.
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