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Pros and Cons of Buying a Foreclosed Home

Are you considering buying a foreclosed home? With the potential to find a great deal on a property that is significantly discounted, the appeal is understandable. Deciding to buy a foreclosure could reap major financial rewards, but keep in mind that there are big risks to consider as well. Read on for specifics, including pros, cons and tips for purchasing a home in foreclosure, so that you can decide if a foreclosed property is right for you.

What are the options?

Let’s level set with defining what a foreclosure is. Lenders take possession of homes when homeowners don’t keep up with their payments. The lenders then put such homes up for sale again. For you as the buyer, the process of buying a foreclosed home differs than buying one owned by an individual homeowner, and you’ve got several options within the foreclosure market.

1. Short sale. Also known as pre-foreclosure, a short sale occurs when a property’s value has declined so much that the homeowner hopes to sell it for less than what’s left on their outstanding mortgage balance in order to recoup some of their debt. You can’t buy directly from the homeowner, however; you’ll need to work with the Seller’s real estate agent.

2. Auction. Foreclosure auctions, conducted both live and online, are events where foreclosed properties go to the highest bidders. While you might be able to buy a foreclosed home well below its market value, you’re at risk for ending up with title issues, unpaid liens or property taxes that will become your responsibility. Not only that, these homes are usually sold as is, meaning you usually can’t walk through the property and must agree to buy the home sight unseen, without a home inspection or home appraisal. Depending on local laws, you may be required to pay cash. Furthermore, the highest bidder may be required to meet an upset price, which is the absolute minimum price the property can sell for as determined by a court in a judicial foreclosure and/or the Seller.

3. Purchase from the lender. Any properties that aren’t sold through a foreclosure auction become bank-owned properties. Because the lender or bank has added the property to their Real-Estate Owned (REO) inventory and thus already handled any title and lien issues, this may be the easiest way to purchase a foreclosure. Also, most banks like to close quickly, so that’s a perk. On the flip side, banks don’t always deal directly with the individual, so you’ll want to connect with a real estate professional if you’re interested.

First, the Good News: The Pros of Buying a Foreclosed House

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 are usually highly motivated to get foreclosed properties off their books, so they may be willing to negotiate with you. This goes hand-in-hand with potentially lower prices, since their motivation can translate to their willingness to accept less than market value.

Quick close.

Again, the lender is motivated to sell and to do so quickly, meaning you could have the benefits of a quick close.

Potential.

Are you someone who’s handy and sees potential in fixer uppers? If you don’t mind getting your hands dirty, you can buy a foreclosure, complete any renovations or repairs that you see fit, and make it your own – or make it an investment property. And if you’re lucky, your foreclosed home may even come with little to no damage or little need for additional work. In these situations, buying a foreclosed home could reap major return on your investment because the fair market value of your home could be much higher than your foreclosed purchase price.

Now, the Bad News: The Cons of Buying a Foreclosed Home

Additional costs and financial risks to the Buyer.

A potential issue with buying a foreclosed home is the additional costs you inherit in back taxes, tax liens, and even legal fees for the eviction and removal of previous occupants. You may be held liable for any debts connected to your new property and this could result in a hefty financial burden that outweighs your anticipated financial benefit.

Poor condition.

Foreclosed homes are usually sold as-is, meaning lenders won’t be held responsible for any issues with the current conditions of the property. Many foreclosed homes don’t have tenants to maintain upkeep and these homes can sit vacant for an extended period of time. Odds are high that the prior occupants – who weren’t paying their mortgage on time – may not have kept the home very well maintained and considerable repairs may be required. After months or years of neglect, foreclosed homes are at risk for plumbing issues, mold build up, or wood rotting damages to floors or roofs, to name a few. You could be looking at major renovations and/or expensive repairs.

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. A loan originator 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 loan originators can help you navigate the foreclosure process and are here to guide you to a home loan program that’s right for you.

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