The Pros and Cons of
Foreclosure House Hunting
Home buyers are constantly browsing the Real Estate market with the aim of securing a superb property at an excellent price. One of the means to this end is searching through foreclosures.
Just to clarify, foreclosures are the result of a homeowner who has defaulted on their mortgage. Specifically, foreclosures are the legal processes whereby a lender tries to recoup a house in which the owner can no longer pay their mortgage. When such an owner can’t pay off the outstanding debt or dispose the property by a short sale, the property is moved up for a foreclosure auction. Should the property still fail to be sold there, the financing institution (usually the bank) takes possession of the property.
Foreclosure properties are on the rise in the U.S. According to Statistic Brain (https://www.statisticbrain.com/), in the year 2015 alone over 1,147,365 foreclosures were filed while 575,378 of those properties went on to be reclaimed. In 2016, 427,997 foreclosures were sold on from the 956,864 filed. These statistics demonstrate the vast availability of foreclosure properties across the nation.
For prospective property buyers, foreclosures present an opportunity to enter the market at a cheaper rate than usual. Home buyers who want to score a good deal invariably consider this option, thinking that financiers are probably desperate to move some of these properties. Sometimes it may be the case, other times it couldn’t be any further from the truth.
Before you dive into a foreclosure, it is important to have a firm idea of its pros and cons to avoid unpleasant surprises down the line. The advantages of buying a foreclosure may include:
- Use of regular mortgage financing options like FHA and VA loans.
- If you have the funds required to pay the outstanding balance on the mortgage you can greatly expedite the buying process.
- The bank may be motivated to dispose the property, giving you the flexibility of making a down payment. This also allows for better price negotiation, escrow length and closing costs.
- The title of the home will be clear so you do not inherit any liens, back taxes or mortgages from the previous owner.
- The original lender may be willing to take care of the necessary repairs on the house to encourage your purchase.
- Seller may be motivated to sell the property quickly which leaves an opportunity for a below market price.
- You can obtain preferred inspections within the contingency period.
- The seller is legally obligated to provide you with a complete history of the foreclosure’s conditions, repairs and problems.
- The home in question has probably been emptied and is ready for the buyer to move in immediately.
- The property will be listed on the MLS and the bank will be responsible for paying the real estate commission.
Although securing a foreclosed home may seem like an excellent deal, there are several pitfalls to be aware of. Some of the dangers to be cautious of when buying a foreclosure include:
- The occupant or owner may still be in the home and might take their time to move out. In the presence of grievances, the occupant might damage the property out of spite or lack of caring.
- If you purchase at foreclosure auction, you buy the property as it is and become liable for repairs, including those you may not have noticed previously.
- Home seller may be unable to negotiate a price below the outstanding mortgage balance.
- Bank will not agree to complete repairs and renovation in some cases.
- Additional hassles may occur from banks requiring additional paperwork.
- Banks cannot provide you with information on the repairs, problem history and condition of the house, so it can be a bit like buying a used car from a stranger.
- You may buy a foreclosure at a very low price but could end up spending more on it if you find hidden damage that is worse than first anticipated.
The Bottom Line
Foreclosures are a great way to enter the real estate market. This method of property acquisition however comes with its risks which should be taken with a grain of salt. While the foreclosure price may be affordable, be sure to evaluate the property in as much detail as allowed.