Thinking About Buying A Foreclosure?

If you know how to buy a foreclosed home, you could get into your next house for less than you think, but beware of the pitfalls.

Although there are fewer foreclosed homes on the market today than there were in the years immediately following the financial crisis, there are still some to be found. While there are some benefits to buying a foreclosed home, the process isn’t as easy as a standard real estate transaction. Here’s an overview of the process, as well as some words of caution before you start your home search.

Why buy a foreclosed home?

For the most part, consumers are interested in buying foreclosed homes — also known as “bank owned” or “REO (real estate owned) homes” — for the potential to get good deals. Because foreclosures are generally sold below market value, buyers can get more house for their money than they would otherwise.

For investors, foreclosed homes often present the opportunity for “fix and flip” profits. Since many foreclosures are in substandard condition, there’s a big opportunity for investors to come in with cash and scoop up homes to rehabilitate.

How to buy a foreclosed home

There are two main ways to buy a foreclosed home: at auction or through a real estate listing.

Once a bank takes possession of a property, it goes to a “public foreclosure auction,” during which the bank attempts to sell the property to the highest bidder. Auctions can go rather quickly, and buyers may or may not be able to inspect the property before bidding, so there can be considerable risk involved in acquiring foreclosed homes at auction.

If you aren’t experienced in foreclosure auctions, you should attend a few to observe the process and determine the requirements to bid. Many auction firms require buyers to bring a certified check for a deposit, among other requirements.

Usually the foreclosures that are listed in MLS (multiple listings service) will not pay for the real estate agents fee, so the buyer has to pay that and usually there is another high fee involved that is sometimes called a technology fee which the buyer has to pay as well.

Things to keep in mind

Before you attempt to buy a foreclosed home, there are a few things you need to know.

First, once you make an offer on a foreclosed home, you should be prepared for the process to take longer than a traditional home sale, often times it will take about 3 weeks to just hear back if your offer was accepted or not. If there were other offers that were higher than yours, you may not even get a counter offer. Instead of submitting an offer to an individual seller, you’re submitting an offer to a bank. Many banks have lots of foreclosures listed at any given time and have multiple layers of approval through which your offer must pass. So be prepared to wait.

Further, an inspection is extremely important when buying a foreclosed home, particularly if the property has been vacant for some time. Many foreclosed homes have problems that are tough to detect with an untrained eye, such as mold buildup in the walls or broken pipes. As a rule of thumb, if you’re bidding on a home at auction and you can’t inspect it first, you should assume a worst-case scenario before placing a bid.

For an inspection the utilities have to be turned on, mostly the bank will have disconnected all utilities and you as the buyer are responsible to pay to have them turned on and then turned off again. The bank will not pay for that. If you are financing the property, your lender will want a complete inspection and of course the appraisal later as well. The appraiser too needs the utilities to be turned on.

If the inspection shows damages to the house in plumbing, mold, electrical or other things you have two options: You can pay for it, in which case you have get bids from licensed contractors on how much the repair will cost. Then that amount times 2 will be escrowed. So if the repair will cost about $3000 you will have to pay $ 6000 into escrow and once you own the house and the repairs are done, you will get the rest of the money back. Or the other option is to walk away. The bank will not pay for the repairs.

Even if an inspection goes well, be prepared to invest a considerable amount of money in repairs. The former homeowners might have neglected maintenance issues, or even intentionally damaged the home when they knew they were facing foreclosure. It’s not uncommon for foreclosed homeowners to sell valuable items, such as appliances, before the bank takes the home.

For really good foreclosure deals, you’re likely to face stiff competition, especially from buyers who can purchase properties in cash. So, if you’re planning to obtain a mortgage, it can be especially tough to take advantage of the best deals.

Foreclosed homes are more likely to run into title issues, such as uncovered liens on the property that can further delay and complicate the transaction.

In addition, the foreclosure process can be tricky. Unless you have a strong real estate background, I would highly recommend hiring a real estate professional with extensive experience in foreclosures. Also, you may run into legal issues when dealing with foreclosures, so be prepared to consult a real estate attorney.

Is a foreclosed home right for you?

So long as you have a somewhat flexible time frame (about six months) for the purchase of your next home, and you’re willing to deal with all of these issues, and you have the extra cash formal the expenses along the way, a foreclosure could be a great way to get into your next home at a cheaper price than you could obtain otherwise. Do your research before placing an offer, and make sure the deal you get is worth the potential headaches.

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