Buying a foreclosed home is becoming an attractive option for the general public due to the low prices of this type of property.
Many years ago, buying a foreclosed home wasn’t something that anyone could do. It involved dealing with a complex legal process but now it has become easier than ever to find and buy those homes. However, the low price also comes with many challenges so you should know the following things before proceeding to buy a foreclosed home.
What Is a Foreclosed Home?
A foreclosed home occurs when a homeowner fails to pay the mortgage. The owner legally forfeits their rights to the property. There are different stages of foreclosure:
- Missing Payments: During this stage, the borrower cannot meet the terms of the loan and fails to do the payment.
- Public Notice: After a few months of failing the payments, the lender will record a public notice stating that the homeowner cannot meet the terms of the mortgage. During this stage, the borrower should be aware that they are at risk of losing their property.
- Pre-Foreclosure: This stage lasts anywhere from 30 to 120 days and the borrower has the opportunity to sell the home via a short sale which consists of selling the home for less than what is owed or pay the amount owed. Those actions would avoid the foreclosure and the negative effects on the homeowner’s credit history.
- Auction: Once the home goes into foreclosure, the lender sets a date to sell the home at a foreclosure auction, they can occur in a city’s courthouse steps, in the trustee’s office or even in the property at foreclosure. The house will be sold for cash to the highest bidder, or the bank can buy it back. Sometimes the borrower has the right of redemption, meaning that they can pay the amount owed and stop the foreclosure.
- Post-Foreclosure: If the borrower isn’t able to sell the house at an auction, the lender owns it and it becomes a bank-owned property.
How Does Buying a Foreclosed Home Work?
When you buy a foreclosure property, you buy it directly from the bank. Sometimes, the process is shorter than it would be if you were buying the home from a traditional seller. Therefore, it is generally a good idea to have all your documentation ready from the get-go.
You have two main ways of buying a foreclosure home: through an auction or through the bank after it takes ownership of it.
If you are buying it at an auction, be prepared to bid against experienced real estate investors. You will also need to have a good amount of money in cash. Keep in mind that when you buy a property at an auction, you buy it “as is,” meaning that you don’t know how much damage it has and how many repairs you will have to pay for down the line. Sometimes, the repairs can be so extensive that you may not end up saving any money buying the foreclosed home.
Buying bank-owned property is generally a smoother process than doing so at an auction. You will have the chance to work with a real estate agent, pay for a thorough inspection of the property and secure financing.
Pros and Cons of Buying Foreclosed Homes
Read on to learn more about some of the biggest pros and cons of purchasing a home that is either in pre-foreclosure, currently being auctioned or already in possession of a lender.
1. You Can Buy the Home for Less
Saving money on a home purchase is typically the main reason why people want to purchase a foreclosed home. Because the seller (in this case, the lender) is eager to sell the house as quickly as possible, you have more room to negotiate, and they may offer you some great discounts.
2. You Have Time to Perform Inspections
You should always take your time to perform the necessary inspections to estimate the cost of repairs. During the pre-foreclosure stage, you will have enough time to perform the inspection, and the seller may even give you a complete history of the property’s condition, including the repairs.
3. Lender Approval Can Take a Long Time
In general, You will need the approval for the mortgage and sometimes this can be a slow process, it may even take about 90 days to get the approval so if you are thinking about financing the foreclosed home get a preapproval mortgage before.
4. Previous Owners Are Not Always Cooperative
If you are purchasing a foreclosed home, then there is a chance that the previous owner could still be living in the property, which means you will need to wait until they move out before you can move in. Sometimes, if the previous owner feels frustrated, they can even perform damage to the property, remove fixtures, take appliances, etc.
5. There May Be Less Competition
This is especially true if you are purchasing our home at a foreclosure auction. These types of home auctions require cash payment, which drastically reduces the number of potential buyers. This can give you an edge if you are able to pay for the home in cash.
Of course, using a huge amount of cash at once to pay for a property sight-unseen may not be the wisest long-term financial option, depending on your circumstances.
6. You Will Get a Fair Price
Very often, foreclosure auctions legally cannot charge more for a foreclosed home than the amount owed on the home’s mortgage, which means that you may be able to get a great deal.
7. You Buy the Property “as Is”
When you buy a home through a foreclosure auction, you have no time to perform an inspection, which may mean purchasing a property that is in need of heavy repairs, major updates, etc.
At an auction, the bank won’t provide you information regarding the property history or condition. Additionally, the lender will not be responsible for making any repairs to the property before you move in. You should also check the title to avoid paying unexpected taxes.
8. Properties Will Have a Clear Title
Sometimes when you purchase a home from a traditional seller, you don’t learn about liens or back taxes on the property until you are ready to close. This can be frustrating because it can end up having an effect on the date of closing or can even kill the sale.
When buying a foreclosed home, however, this will not be an issue. You won’t have to deal with paying unexpected back taxes or liens of the previous owner. In other words, the title will be clear.
9. Buying a Foreclosed Home Is Slow Process
Many banks usually require more paperwork when it comes to buying a foreclosure home, and this could make the process last longer than you wish to.