Buying a home that’s been foreclosed on can be a great option if you’re looking to buy real estate at an affordable price or if you want to get in the real estate market without going through the hassles of finding and buying land yourself. However, it’s important to remember that this sort of purchase comes with some risks, so be sure to weigh them carefully before deciding whether or not to buy a foreclosed home. Here are some pros and cons of buying a foreclosed property and legal considerations you should consider before jumping into this purchase.
Let’s Talk About Foreclosures (The Good)
When a house is in pre-foreclosure or short-sale, the owner is facing financial limitations, and time is of the essence. Before losing ownership of the property, they must get what they can while they can.
Essentially, these sellers don’t have much leverage, so a buyer can gain a significant advantage while it may seem cruel to take advantage of their situation.
When the property has been seized, the buyer is even better off. The sheriff’s office and banks do not want to hold onto the property. Banks and financial institutions usually want to get rid of foreclosed properties promptly. They need to get a fair price. The investors and auditors are looking out for their best interests. Even so, buyers have an edge.
If the seller is not underwater on the mortgage, he or she may provide price concessions and do repairs to the property. If it is a short sale, the purchase price will be less than what is owed on the mortgage. In some cases, the seller and lender are actively trying to avoid foreclosures. This may motivate them to lower the asking price.
Sellers are obliged to provide information about the property’s condition. Buyers are entitled to do standard title searches and purchase their desired inspections during the standard due diligence contingency period.
A buyer may purchase the home using traditional financing, and the seller may be willing to engage in alternative financing options such as lease-purchase agreements or mortgage assumptions.
Buying a foreclosure and repairing it allows you to increase the value of the home and have some equity, with the added possibility of gaining a substantial return if you decide to sell the property to investors.
The Potential Downfalls of Buying A Foreclosure Home
Foreclosed homes usually come at a discount compared to the market price, which is a big plus.
Nevertheless, these properties also have some drawbacks.
Foreclosed Homes Are Sold “As-Is”
When buying foreclosed properties, they are usually sold in an as-is condition. This means that you might not be able to get it inspected, and the house may not be suitable for touring before you make a bid.
Some foreclosure properties need repairs because they have been vacant for a long time, their previous owner didn’t take care of them, or the last occupant damaged the home.
You May Need Large Sums Of Cash
Apart from rehab costs, you’ll most likely need cash up front, too-especially if you’re buying the foreclosure at auction. Often, cash bids are required at these auctions. Even if you do not bid on a foreclosed home at an auction and have good credit, you might still be able to get financing.
There May Be Hidden Costs
One possible hitch for buying a property at auction may be if it has tax delinquencies such as back taxes or liens imposed by the IRS, the state, or other creditors. If not addressed beforehand, these improvements can increase the purchase price significantly.
Payments must be made to the government before any additional expenses, like a home mortgage, can be made.
Investing in and flipping worthwhile foreclosed properties will generate increased interest and competition — not just from potential occupants but from investors and professionals.
Houses priced very low sometimes have many offers and cause bidding wars. If a foreclosed house seems like a bargain, it may quickly become a costly property.
The buyer might submit bids on several properties at once in hopes that one will work out.
Even if someone makes a better offer than you and your offer gets trumped, it may reappear in the bank’s inventory later. I’m sorry to say, deals on foreclosed homes often fall through.
Overwhelming Paperwork & Documents
It may involve more paperwork than usual if there are any of these complications.
A foreclosed property generally has many additional documents that need to be processed in advance, and that process doesn’t always proceed as swiftly as the prospective buyer might want.
In a short sale, the owner’s lender must approve the deal, which can delay closing. Damage found in the house during the home inspection can result in a lower home appraisal, which may impact the buyer’s ability to obtain a loan. Some lenders won’t make loans below a specific dollar amount because the risk potential on a lesser loan isn’t worth the minimal potential profit.
The time it takes to get a response to your bid is variable, depending on whether the bank holding the property is swamped with foreclosures. In that case, it can take a long time to process your request. If a bank has a sizable waiting list, it may take them up to 90 days to contact you about your offer.
If you are going to finance your purchase, you would do well to get preapproval for a mortgage. This would be likely to expedite the process.
If you want to purchase a foreclosed home, it would be wise to consult a real estate lawyer to better understand the process.
The Legal Perspective Of Buying A Foreclosed Home
It’s typical for a foreclosure to undergo several stages, and it can take a while. But if you buy a property in one of these stages, there are advantages. Although this is a possibility, it is still a good idea to review all documentation and contact a real estate lawyer to ensure all of it is legitimate, legal, and valid.
Potential Issues When Purchasing Before Foreclosure
Since foreclosure is a complex process that takes time, it is often better to purchase the home before any third parties are involved to avoid complications. If this is true, the house would be sold to the homeowner, who might receive a cash out that is less than the actual value of the building. Therefore, the new owner gets money without having to deal with the lending agency that provided the mortgage. The new owner can take over the mortgage or start a new one with the same or different financial institution.
If possible, the new owner should research all of these factors, including possible claims and debts on the property, before beginning their investment and will be prepared to manage various outcomes accordingly. When you buy a home, there may be financial debts from previous owners and contractors on the property. Depending on the terms of the contract, you may be required to take over the debts as soon as you sign the agreement, or you may be able to renegotiate.
Issues May Arise In A Foreclosure Auction
Unless you have a lot of experience, buying at an auction can be difficult. Many other people are thinking the same thing and all bidding no matter the price. Auctions are still somewhat rare, and the typical bidding process is the highest bidder buys, take it or leave it. This may be an expensive mansion, or it may be falling apart, but a major drawback to this kind of purchase is the ability to thoroughly inspect the property beforehand. They rush the process so they can receive the funds as soon as possible, and if the problem cannot be detected by someone on the outside looking in, they generally will not disclose the flaw.
You’ll notice several things if a foreclosed home has been vacant for a while. Among them, there could be multiple defects, including weak foundations, collapsing walls, and property damage. In addition, it may be encumbered with expenses like back taxes and even legal claims. Most of these attachments have occurred since the home was placed in foreclosure. In some states, the previous owner might have the opportunity to redeem the property. It is mainly regulated by state law and only possible for a certain period from the time of foreclosure.
Potential Issues With The Tax Folk
IRS is able to redeem the property after 120 days when back taxes are owed and not paid. There may be other redemption laws applicable in the state where the property lives, and it is strongly advised to contact an experienced real estate attorney to protect against seizure of purchased real property. He or she will try to prevent the home from being repossessed.
Still Thinking Of Buying A Foreclosed Home?
So, is buying a foreclosed home right for you? It depends. If you’re up for a bit of extra work and are comfortable with the risks and unknowns, then it could be a great way to get a deal on your next home. Just be sure to do your homework first and consult with an experienced real estate agent or attorney to help guide you through the process, before you decide to buy a foreclosed home.