The housing market has been improving over the last year, but homebuyers still need to be careful when purchasing a property that is in foreclosure.
Foreclosures are a hot topic, and while you may feel like they are a good buy, there are some things to avoid so that you can be satisfied with your home.
It’s always a good idea to be prepared, but buyers need to do their homework before making an offer on a foreclosed home they are interested in.
First-time and experienced home buyers alike often make mistakes when choosing properties in foreclosure by forgetting key details or rushing into deals too quickly.
Buying a foreclosed home can be a smart, real estate investment. However, there are plenty of pitfalls that can turn your property search into a disaster.
Below are 5 Things to Avoid when you’re looking for foreclosure homes:
- Timing Issues
- Hidden Costs
- Property Maintenance
- The Buying Process
- Additional Risks
During a foreclosure, you have a great opportunity to get a home for the cheapest price possible.
However, some people fall prey to later buyers’ scams and other foreclosure red flags when buying a foreclosed property. If you want to avoid getting involved in similar scams and find a great opportunity that will help you save money, then keep reading.
What Does It Mean to Buy a Foreclosed Home?
Foreclosed homes are part of an inventory of properties owned by banks and other mortgage lenders. This lender inventory is often called the “REO” or Real Estate Owned inventory.
When you purchase a foreclosed home, it means the house has been taken through an auction by a bank or other lender.
They might have lost patience waiting for the owner to pay back some of what they owe and decided to sell it at a loss. Or, they might be stuck with a property that is worth less than what they lent on it and get nothing if there is no buyer.
People who want to buy foreclosed homes must act quickly. Banks that own foreclosures typically sell at a discount, and they quickly sell off inventory.
If you find just the right property at a great price, it might be gone before you know it.
So What Do You Need to Look out for?
Because a foreclosure doesn’t sell the property directly, more paperwork is involved. Each step in the process requires additional documents and signatures.
The mortgage documents must be reviewed, signed, and delivered.
Work with your attorney to set a closing date and then work with your real estate agent and the seller’s agent or broker to coordinate the closing date with other contingencies.
2. Hidden Costs
Foreclosure and real estate professionals call these homes “distressed sales.” And the prospect of buying distressed property gives many people a chill.
These days, scores of would-be homeowners are frightened away by the prospect of having to contend with a foreclosure time bomb. For example, this scenario here…
The property you seek could have substantial hidden costs that can result in tens of thousands of dollars of expenses─and those costs could be coming out of your pocket.
The problem originally stems from a lack of transparency on the part of banks and other lenders as well as real estate professionals who aid them in selling foreclosed homes.
The reason for buying a foreclosure property is to save money and make the investment viable. This will not happen unless there are repairs done and they are done professionally.
3. Maintenance of the Property
If you’re thinking of purchasing a foreclosed property, you must consider the potential for problems during any property inspection and thereafter.
When you make an offer on a home that’s in dire need of repair, you’re going to want to know what the maintenance will cost.
Bigger issues, such as structural integrity, can usually be discerned from a home inspection. Smaller concerns will only be revealed upon close inspection and living at the property.
You can avoid costly maintenance problems by:
- Using a professional home inspector before you buy it.
- Measuring and inspecting for asbestos or other toxins.
- Making sure the property has no water damage.
- Finding out whether mold is present in the home might cause future health problems.
When buying a foreclosed home, finding out the condition of structures and systems like the roof, plumbing, electrical, and heating/cooling system is critical.
I will help you navigate through these conditions to identify if they are repairable or not and help you discover the true value of this home.
4. The Buying Process
By definition, foreclosed properties are discounted because they are bank-owned. A foreclosure home purchase can also involve some hiccups.
All of the hassle and stress that go along with buying a foreclosed home can be frightening, especially if you are the one who has to do all of the paperwork.
Purchasing a foreclosure can also be somewhat risky.
There is no title insurance in the process, and the last owners may have left unpaid debts that you could inherit. On top of that, the foreclosure process is long and complicated
One of the biggest roadblocks that you may run into when it comes to buying a foreclosed property is that the seller may not be willing to transfer ownership to you.
When this happens, it’s called a title defect.
The seller won’t be willing to transfer ownership if the previous owner defaulted on their payments, and didn’t pay off the balance due.
If you’re lucky, they may have an escrow mechanism in their probate documents allowing them to hold onto a percentage of the sale as payment toward what’s left on the mortgage.
5. Additional Risks
Foreclosures allows you to make an offer on a home at its current market value.
Because the sale is non-contingent, you won’t have to compete with other buyers and can enjoy some peace of mind that there are no strings attached.
A property can also come with liens (or unpaid bills relating to the property), code violations, or title issues. You need to research the property thoroughly before making an offer and make sure the seller’s disclosure is in order.
To avoid surprises, it’s important to consider the purchase price alone is just part of the overall cost of buying a house.
Factor in closing costs (the fees associated with transferring or recording property ownership), mortgage interest, property taxes, ongoing maintenance costs, and any liens or unpaid bills associated with the property.
Image credit: Scott Webb