If you don’t mind extra risk to get a great deal on a property, foreclosures might be an intriguing opportunity, especially if you’re an investor. The main reason to consider foreclosed property is the chance to get a property you normally couldn’t afford for a discounted price.
This blog reviews the benefits, complications, and potential obstacles of foreclosed properties.
What are Foreclosed Properties?
A foreclosed property has been taken by a lender usually because the owner failed to pay the mortgage payments. When a lender forecloses on a property, the lender can sell the property and repay the loan with the proceeds from the sale. Foreclosed properties are considered “distressed” financially and/or physically.
If the borrower cannot work out a pre-foreclosure solution, then the property may be sold at auction, usually cash only, held by a trustee or sheriff. At the auction, if no one bids higher than the default amount, the lender takes the property. Then it’s called “real estate owned (REO).”
Benefits of Buying Foreclosed Properties
Why are foreclosed properties a good opportunity? You’re dealing with the lender or bank, not the owner. Lenders want to quickly get as much of the original mortgage amount as possible. This gives foreclosure buyers bargaining power.
Advantages of buying foreclosed properties include:
- Bargain opportunity: You could get a property at below market value.
- Get a larger property for less money.
- Find a cheaper house in a high-end neighborhood.
- The lender is eager to get rid of the distressed property.
- With REOs, the lender usually clears other liens on the property, so this is safer than an auction.
- Opportunity for big return on investment if the home value appreciates.
Pitfalls of Buying Foreclosed Properties
While there’re great opportunities for smart, brave purchasers to get more house for less money, there are several downsides to a foreclosure transaction. Generally, there are more risks and uncertainty involved with distressed properties. And you have to follow the lender’s timeline and meet all of the lender’s requirements.
The common pitfalls of foreclosure properties include:
- The sale is as-is, so the lender won’t allow contingencies.
- Limited opportunity to inspect the property as it may be boarded up
- No seller disclosure requirements regarding property condition
- Bad condition: The delinquent borrower likely failed to maintain the property. The house may have sat empty during the long foreclosure process.
- In some states, the right of redemption allows delinquent borrowers to reclaim the property during the foreclosure process by paying the past-dues amounts and fees.
- Slower and more complicated process: This means lots of paperwork. Expect slow response times with the bank and others.
- Competition and bidding wars: Savvy investors have a nose for attractive deals, so be prepared for high demand and more offers.
- Need for unconventional financing
- Additional costs due to needed repairs and the higher likelihood of additional liens
Tips for Buying Foreclosed Properties
So, if you’ve weighed the pros and cons and are ready to make the leap, be prepared and do your homework. You may be competing with experienced investors. As with all real estate purchases, first get your finances in order.
Other tips include:
- Check public records and the county courthouse websites for foreclosure sales
- Get pre-approved for a loan
- Register for foreclosure auctions and observe a few to learn the process.
- Hire a real estate agent who specializes in foreclosed properties. He or she will know where to look for distressed properties, have contacts with lenders and local real estate professionals, and can guide you through this unconventional sales transaction.
- Get a home inspection or have your agent find a recent inspection
- Have the title searched for additional liens
- Be prepared to live somewhere else while repairs and renovations are completed
As you can see, you’ll need patience and tolerance for risk and uncertainty. Preparation and the advice of experienced real estate professionals are important for all real estate transactions, but this is especially true for foreclosed properties.
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