Featured News 2020 The Perils of Buying a Foreclosed Home

The Perils of Buying a Foreclosed Home

For some people, buying a foreclosed property can be the path to home ownership. For a lot of people though, the process is full of pitfalls. Before plunging in on this big decision, you need to understand what it would entail to purchase a home that has been foreclosed on, and whether you are up to the task.

How Much Experience Do You Have as a Homeowner?

First of all, are you a first-time homeowner? There are a few reasons buying a foreclosed home would be better for someone with previous homeowning experience. For instance, foreclosed homes sold at auction often have problems that the bank cannot disclose at the time of sale. Inspections aren't permitted, which is one of a home buyer's biggest protections in a normal sale.

If you buy a foreclosed home from an auction, you may also be responsible for any liens or back taxes owed on the property. If you can buy a house directly from the lender (bank), the title will be clean—but the bank won't do any repairs, you'll need to do additional paperwork, and the history and condition of the house will still be undisclosed until the sale is finalized. No matter what, you're essentially buying a house completely blind.

Are You Ready for a Major Investment with Slow Payoff?

That brings us to our next potential risk: you will really need to look into the financial investment it will take to make the house into a living space (for yourself or for renters). The repairs the house will need could exceed how much you saved on buying a foreclosed home, and you have to consider the years it could take before you make a profit from renting the house out.

You have to take stock of where you stand financially and determine whether or not you can handle the unexpected costs that arise from bank-owned homes. This is especially true if the home was left uninhabited for weeks or months. The previous homeowners could have left a mess, and animals might have gotten in, as well as thieves and squatters. If left abandoned for long enough, you may discover that some copper plumbing is missing from the property. And even after you have restored a home in disrepair, you could see the value of the house drop because of the market!

Here's what you need to ask: is your debt low enough? Do you have enough funds? Do you have equity? These questions and more must be answered before you sign on the dotted line. Remember that you will have to invest in having experts on your side too, as real estate agents and lawyers and investors are all familiar with the inscrutable process that is foreclosure.

Pre-Foreclosure Property

So if you think you might want to buy a foreclosed property, there are multiple ways to do so. For example, you could buy a property before it actually goes into foreclosure. This could be your best opportunity. Pre-foreclosure is when the homeowner is in default, and the lender has filed a public notice saying so. These notices are accessible in the public records office, or even from the local newspaper.

If a property catches your eye in this stage, you could have several months of research available to you to get inspections and market analysis, etc. If you can act before the home is listed, you could beat any potential home buyers to the punch, and you could get a better price to boot. A seller may be more willing and flexible at this point too; you may even help them keep from taking a hit to their credit score. Just remember that a homeowner who has fallen behind in payments means that you could be buying a fixer-upper, and you could still face judgments for an outstanding second mortgage, for example.

The Foreclosure Auction

What about the foreclosure auction? If you have done enough research on the property ahead of time, this might be the time to get the best price for a foreclosed home. At an auction, you may be told when the closing date would be, and there will likely be a due diligence packet replete with all the data you need on the house (so you can find out how sound your research was).

That being said, you wouldn't be able to get a loan for the property, so you would have to pay in cash or a cashier's check. In the bidding battle, you could end up paying more than the property is worth. And you have to trust the packet you are given, as you will likely have precious little opportunity to look into the information yourself. If the property is empty, the next step will be cleaning, replacing appliances, and doing all manner of repairs.

Real Estate Owned Property

If a lender is unable to auction a house, they can repossess it, making it a real estate owned (REO) house. This could furnish you with the time necessary to have an inspection and to research the title. It could also be a time where a bank is amenable to work with, since they want ownership of the house off their hands. You also would not have to deal with any eviction issues, as the property will be empty.

That being said, the bottom line is that you would have to be working with a bank. This could mean a high price tag and a considerably slower process. You can rely on a bank to get back to you late, to shovel over extra paper work, to not respond to you, and to take weeks to get back to you on your offer. Those are just a few of the things you'll need to watch out for as you embark on buying an REO home.

If you are thinking about this purchase, or if you are ready to wade into the challenges and potential successes of buying a foreclosed property, do not go without the legal expertise you need. Call a real estate lawyer today!

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