Advantages and disadvantages of buying a foreclosure
If you are considering buying a foreclosure, you should ensure that you have evaluated complete pros and cons of such type of transaction. But before getting to the facts, it is important to get a good understanding of what exactly is foreclosure.
A foreclosure is a process through which a homeowner is deprived of his rights to a property because of the failure to pay the mortgage. If the owner is unable to pay off the outstanding debt, the property goes to a foreclosure action. If the property does not sell at the auction, it belongs to the lending institution.
So is a foreclosure right for you? Let’s have a look at its pros and cons with reference to specific aspects in the buying process:
Missed payments/Motivated seller
- Sellers are usually motivated to achieve a fast sale which creates opportunity for below market purchase price
- Buyers are typically eligible for using regular mortgage financing (unless some portion of the home makes it uninsurable- i.e. a roof in disrepair).
- Buyer gets the advantage of obtaining desired inspections with contingency/standard due diligence period. Although the Seller will typically not repair or compensate any found defects, the Buyer has the opportunity to cancel the contract without penalty during this time.
- Home will appreciate immediately- because you are purchasing the home at a great discount, it will appreciate almost immediately, and allow for greater appreciation with repairs than a typical residential resale purchase.
- Home will typically need far more repairs and updates than a standard residential sale
- Seller will typically not make any repairs on Buyer’s behalf, so Buyer must be prepared to handle.
- Seller’s Disclosure with extensive background information on the home typically not available.
- Seller may not be able to negotiate price below the mortgage of seller’s outstanding balance
- More competition to purchase, bidding against cash investors. If you plan on living in the home, keep in mind that there are many foreclosures (i.e. through homepath) that have a period where the home is only open to purchase for Buyers that will occupy the home.
- Have to make purchase decisions/offers quickly. Due to how quickly foreclosures sell, Buyers should be prepared to act quickly.
- Property will be sold for outstanding balance of mortgages balance owed to foreclosing the holder of mortgage. This is usually a low price for the property
- Competition is reduced due to cash payment
- No inspections are allowed, as its sale
- The purchase of auction must be paid in cash on the same day as in the auction, no mortgage is usually allowed
- Due to property condition/history issue, bank cannot provide disclosure
- If bank believes that the auction will not recover a good price, it may itself buy the property at auction
- No fees for attorney or commission will be paid. Buyer should pay for their own representation
- The condition of the property might be subjected to damage by upset homeowners
- Buyer may take the property back and owe other taxes, liens and mortgages. Prior to auction, buyer should research state of title.
Pre-foreclosure or Lis Pendens Filed by Lender/Short Sale
- Buyer can perform all standard inspections, including researching the title during due diligence or contingency period
- Seller is motivated for fast sale which further leads to increase buyer’s bargaining power
- Unless mortgage(s) is paid by purchase price and closing costs in full, the approval of price and terms by lender is required. This is applicable in case of short sale
- Short sale may take up to 45-90 days to close
- Lender may not approve seller concessions or closing cost credits
- Sellers have to move out
Post-foreclosure Bank owned property REO
- Bank usually stays motivated to get the property sold. It will even negotiate price, closing payments, escrow length, escrow length etc
- Title is clear and buyer does not take on any liens back taxes, mortgages or prior owners
- House will remain vacant
- REO sales close down within a normal escrow period of time
- Property will get listed on MLS which means that bank will pay real estate agent’s commission
- Mortgage financing and inspections are allowed within the normal contingency/diligence period
- Bank usually asks for additional paperwork
- Bank cannot provide disclosures as to the history or condition of the property
- Bank will not agree on doing any repairs, is it is sale
As we can realize, there are certain cons as well as pros to buying a foreclosure. Besides these, always remember that buying a foreclosure requires cautious budgeting, the right real estate team and probably a mental resolve to get through the purchase process successfully.
Need help purchasing your first foreclosure, or do you want to learn more about the purchase process? Contact SCUDO today! We can begin sending you lists of foreclosure homes in your specified area of preference today!