Buying a foreclosed home comes with risks but it has several advantages, like that it may be priced below market value. Before you decide to purchase a foreclosed home, you should learn more about what a foreclosed home is and consider the advantages and disadvantages. This decision is one that may provide a significant return on your investment or it could turn out to be an absolute nightmare.
What Is A Foreclosed Home?
A foreclosed home is seized by the bank after the homeowners, or borrowers of the mortgage loan, failed to make their mortgage payments. If the borrower doesn’t work out an agreement with the lender by a specified deadline, the property will be put on a foreclosure auction. If it is not auctioned off, the bank takes possession of it and it becomes a bank-owned property. At this point, the bank is trying to sell the property as soon as possible to get some of their investment back. Bank-owned properties are sold on the open market or at a liquidation auction.
Priced Below Market Value
Since the bank is attempting to salvage some of their investment in the property by selling it quickly, foreclosures are usually priced below market value. In some instances, a bank may decide to invest in repairs or renovations and consequently it may no longer be a bargain. However, some investors jump at the idea of buying a foreclosure as the return on investment can be very high if the property is priced low.
With a traditional home, if a homeowner has back taxes due or a lien on the property and they refuse to take care of it before closing, it may prevent you from purchasing the property. However, an upside of purchasing a foreclosed property is that the bank clears the title for you so there are less concerns about complications arising due to the title.
For homebuyers, a foreclosed home priced below market with a clean title can mean snagging the deal of a lifetime. But there are disadvantages of purchasing a foreclosed home that you need to be aware of.
Condition of The Home
As the property was foreclosed on, it means that the homeowners were unable to make their mortgage payments, which also indicates that they probably were not maintaining the home as well as they should have. A home that is foreclosed on can be an indicator that the condition of the home is not optimal. This means you need to consider the possibility that your maintenance costs could be well above average compared to a home that has not been foreclosed on.
Negotiating With A Bank
There are benefits to negotiating with the homeowners of a property. They make take personal reasons into consideration and be swayed to accept an offer lower than list price if you provide a nice letter or if you hit it off upon meeting. On the other hand, some homeowners may be so sentimental about a home that they may not take a penny below list price. When you negotiate with a bank it is very different. It is simply business to them and if the number is not right they will reject your offer. In most cases, the list price of a foreclosure is already below market value and banks are unlikely to take an offer below list price.
Funding To Purchase The Home
If the property is in poor condition, the inspection may uncover many issues with the home. In this situation, you will have a hard time getting a mortgage to buy the property. For this reason, many foreclosed homes are purchased in cash. If you require a mortgage to purchase a home, keep in mind that the property will need to be in good condition for a lender to approve the property.
What Is Right For You?
Now that you have learned about the different factors to consider when buying a foreclosed home, think about your situation. If you are someone who loves working on houses and you would be capable of doing maintenance and remodeling it on your own, then this could be a good option if you can find funding. Buying a foreclosure is also appealing for investors looking to “flip” the house. On the other hand, if you’re shopping for your first home and you need a mortgage, this may not be right for you. There is no one answer that applies to every person or situation when it comes to real estate. Consider the pros and cons before you take the next step and learn more about how to buy a property that will increase in value so that you can make a more well informed decision on your investment.
If you decide to pursue purchasing a foreclosed home, you should know what red flags to look for in the walk-through and even more so in the inspection. Read 7 Signs To Look For During A Home Inspection.
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