Things To Know Before You Buy A Foreclosed Home 

Foreclosures have a negative image in the minds of many buyers who see them as risky choices requiring major repairs. The fact is that foreclosed properties are great opportunities for the right buyers. If you’re beginning your new home search and trying to decide whether or not to consider foreclosed homes, its helpful to understand the pros and cons are of buying them to ensure your getting the best deal and to avoid any costly errors.

Some foreclosed properties are offered at auction. Auctions can take place on site, at the courthouse, or online. Bidding is open to the public. Auctions typically open with a bid that reflects the loan balance, interest, and attorney’s fees. The property sells if the opening bid it met.

Properties that don’t sell at auction go into the lender’s portfolio as real estate owned, REO. Lenders don’t want these properties on their books and will often do minor repairs and clean them up in order to move them as quickly as possible.

Benefits of Buying Foreclosures

1. There are a lot of them available. 

Lenders don’t have the number of foreclosures they did a decade ago, but there are still plenty of foreclosed properties on the market. They come in all sizes and price ranges. The easiest way to find them is to contact a Realtor experienced in selling foreclosed property.

2. Most are great investments. 

This is true for investors who plan on fixing houses and reselling them for a profit and buyers who plan to use them as primary residences. Investors can see as much as a 30% return on their investments.

3. Closings are usually quick.

Lenders are eager to close because they want these homes off their inventory lists. Buyers paying with cash can usually close in 30 days or less. Issues that can delay closings include title problems, inspection contingencies, and extra paperwork.

4. You might be able to buy into a neighborhood you couldn’t otherwise afford. 

People at all levels of society can get into financial difficulties. It’s not uncommon to see foreclosed homes in affluent neighborhoods. 

Drawbacks to Buying Foreclosures

1. They are almost always sold as is. 

Sometimes prospective buyers are allowed to conduct home inspections. Other times they are not. If the inspector finds major deficiencies, you will be out the money you spent on the inspection. You can request that the lender make repairs, but if the property is being sold as is your request will be turned down.

2. Financing can be tricky. 

If you’re paying cash you won’t have a problem. If you’re trying to obtain financing it can be another story. The bank appraisal is often the sticking point. The appraiser’s job is to make sure the property is worth the money being loaned. 

Appraisers also determine what safety issues are associated with the property. A lot of foreclosed properties are in less than pristine condition. It’s the responsibility of the buyer to correct the issues. If you’re in this situation one possible solution is an FHA 203K loan. This will allow you to add the costs of repairs and rehabilitation into the financing.

3. Buyers can face a lot of competition. 

The discounted prices associated with foreclosed properties is the primary reason for the competition. This is true for investors and owner occupants. 

You have to be careful if you are in a competitive bidding situation. It’s very easy to get caught up in the excitement of the moment and overbid on a property. It’s not unusual for final bids to be significantly above market value because of this. 

The auctioneer’s client is the bank not you. The auctioneer’s job is to get the highest and best price for his client. That means he won’t keep you from bidding even though he knows you’re bidding too high. Once the gavel comes down, and the auctioneer cries sold, the property is yours. The best idea is to decide in advance how much you are willing to bid, and then stop once you’ve reached your limit.

4. A lot of foreclosed properties come with added costs.

There are costs associated with buying any kind of home, but the costs associated with foreclosed property are sometimes different. Some of the items typically paid by the seller are the responsibility of the buyer of a foreclosed property. Additional costs associated with these sales you have to take into consideration may include:

• Outstanding mortgage fees
  

• Back taxes, interest, and penalties
  

• Liens
  

• Title preparation

It’s important to weigh all the pros and cons before deciding whether you want to pursue the purchase of a foreclosed home. Foreclosures can be great opportunities for investors and other cash buyers. Sometimes they are risky choices for first time home buyers. It’s up to the individual to decide if pursuing a foreclosure is worth the drawbacks.