Realtors' Guide to Buying a Foreclosure


Pros, Cons, and More

     Pontential home buyers and would-be investors alike have grown to view foreclosures as great opportunities for saving on their purchase and potentially earning a quick return. Buyers may be able to find discounted foreclosures, which are often priced competitively- but buying a foreclosures can bear some measure of risk. It's essential to understand the pros and cons of buying a foreclosure before making a purchase.

     Firstly there are several types of property that are referred to as "foreclosures." A "pre-foreclosure" is a home which is at risk of entering foreclosure but is still owned by the homeowner. A "foreclosure" is a property that will be sold or repossessed by the creditor or  lender to recover the amount owed on it. While pre-foreclosures are available for purchase from a homeowner, foreclosures can be bought at auction or as "bank-owned" or "real-estate owners" properties from a lender.

Pros:

-You may be able to purchase a home lower than market value. If the home is in pre-foreclosure, the homeowner is aiming to sell the home to avoid entering the foreclosure process. These homeowners are typically motivated to sell quickly- to the advantage of buyers. Banks sometimes offer the home at a reduced price as the longer they hold these properties, the more it costs them in terms of taxes, maintenance, etc. Oftentimes creditors are willing to take a small loss in order to sell quickly and recover their principal.

-Foreclosures can be found at all sorts of price points from starter homes to luxury properties and multi-unit complexes. Sometimes they are in need of mere minor repair and small upgrades.

-With some time investment, repairs, and upgrades a homeowner can turn a greatly improve a foreclosure and enjoy a significant appreciation in value.

Cons:

-Due to discounted pricing and large demand, foreclosure are sometimes subject to bidding wars amongst competing buyers.

-Foreclosures aren't always offered at a substantial discount. Homeowners in the pre-foreclosure stage may price a home higher than it is worth in the hopes of paying off a mortgage, taxes, etc. Banks are looking to recoup as much as possible on the house in the allotted time frame and may only offer a slight discount to draw attention.

-Oftentimes foreclosure auctions require that buyers pay cash, sometimes on the same day, meaning buyers may be unable to inspect the home prior to purchase.

-Distressed properties like foreclosures do not qualify for loans with some lenders.

-Some foreclosed properties may require significant investment or costly repair. Always strive to get as much information as possible about the property and arrange for a home inspection if possible.

-Foreclosures are occasionally vandalized or looted. Verify that all major appliances are present and look for any signs of vandalism or theft.

-Foreclosures have a tendency to sit empty, sometimes for an extended period. This may cause major maintenance issues. If a home is not properly maintained, it opens the door for frozen pipes, vermin or bugs, and mold.

Conclusions:

     Foreclosures are a great opportunity for experienced buyers or first-timers inclined to do research and make renovations or improvements. However, without proper investigation, a buyer may end up with liens attached to the property or paying costly debts tied to the home itself. Though rare it is not unheard of for foreclosure buyers to start eviction proceedings and pay legal fees for getying the previous tenants out of the home. Lenders can be time-consuming to purchase from, as transactions are often full of red tape. Be sure to work with a talented and experienced local Realtor in order to assure the process goes smoothely. Follow these steps and enjoy a low-cost, appreciating investment!