Most often when searching for the perfect home Buyers will always ask “How about looking at some foreclosures.” There is a big misconception with a Foreclosure Homes and it is often associated with getting the deal of a lifetime on a home. This is not always the case there are potential pitfalls to buying a foreclosure that you may not be aware of. Before making an offer on a foreclosure it is important to understand what you are getting yourself into.
There are two different types of foreclosures:
Pre-foreclosure: Is a home in which a homeowner already has missed payments on the mortgage and is in danger of falling into a foreclosure. In this case the home can still be purchased from the homeowner.
Foreclosure: Is a home that will be sold or repossessed by the lender or creditor to recover the amount owed on the mortgage. In this case the property will either be sold at an “auction” or as a “bank owned property”
Pro to Buying a Foreclosure
- In a “Pre-foreclosure” the seller is looking to sell the home quickly in order to avoid a foreclosure. The purchase price will often be at a lower than market value for a quick sale giving the buyer an advantage.
- With foreclosures the last thing a bank wants to do is hold on to a property longer than necessary the longer they maintain a property the more taxes and maintenance they have to provide. So often times buyers can purchase these properties at a discount.
- Foreclosures can be found at all different types of price points from starter homes to luxury homes some of which require only a small amount of repairs and/or upgrades.
Con’s to Buying a Foreclosure
- Competition – If a foreclosure is listed for way below market value chances are there are other buyers bidding for the same property. You will be competing with multiple offers. This becomes a big disadvantage if you are financing and competing with a cash offer because even if their offer is lower chances are the cash offer will take precedent.
- Large Discount- This is not always the case in a foreclosure the bank or lender is looking to recoup at the minimum what is owed on the mortgage so a large discount is not always given. Same goes for a pre-closure the seller is trying to at least sell the property for what they owe on the mortgage and will often times list it at a higher sales price.
- Getting a loan- Some lenders will not lend money on distressed properties “Foreclosure”
- Liens – You may not be aware of liens that have been placed on the property until after you have purchased the home and guess who’s responsible for paying off these old debts “the buyer.”
- Repairs – These homes tend to stay vacant for long periods of time which over time can cause a significant amount of damage to the property such as pipes freezing from lack of use, rodents and vermin tend to make a home within the property, and mold will often start to grow. Keep in mind foreclosures are sold “As-Is” it is very rare that a bank is interested in making any types of repairs or footing a bill for them or that a Seller can afford to make such repairs prior to closing.
- Closing on a foreclosure- Purchasing from a bank can be a lengthy time-consuming process with a lot of red tape involved. The process to make on offer on a foreclosed property changes from bank to bank but is always very streamlined and specific , all instructions on submitting an offer must be followed with precision or your offer will not be considered. Negotiation is usually none existence the bank will always go for the best offer and either counter it or accept it.
If you are only interested in purchasing a foreclosure because you are looking to get the most bang for your buck it can be done and they are out there you just have to have a lot of patience and understand that you will be placing multiple offers on different properties.
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