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The Advantages and Disadvantages of Buying Foreclosed Homes

There can be advantages and disadvantages to buying foreclosed home. In the best case scenario you could buy a home for far less than its market value. There are many factors that can affect how well buying foreclosed home turns out, including where you purchase it and the condition of the property before you buy it. Not taking the time to do some research ahead of time can easily land you in a dicey situation, so it definitely pays off to educate yourself as much as possible ahead of time.

First, it is important to understand the basics of a foreclosed home. A foreclosed home is one which the homeowner has defaulted on the mortgage loan. When an individual buys a home and takes out a mortgage loan they agree in writing through a contract to make regular payments on the loan. When they cease to make payments as agreed to in the contract, the mortgage lender or bank retains the right to take back the property. This triggers the foreclosure process.

Foreclosure properties can typically be purchased in one of three different phases; pre-foreclosure, auction or as a bank owned property. When a property is purchased during pre-foreclosure, the bank has not actually foreclosed on the property and the property is purchased from the homeowner before the foreclosure actually occurs.

Once the bank forecloses on the property, they may hold a public auction and sell the property to the highest bidder. This is a common scenario in which foreclosed properties are purchased. If the property is not sold at auction, the property may still be purchased as a bank owned property at a later date.

When buying foreclosed homes it is important to understand both the advantages and the disadvantages. During the pre-foreclosure period, a buyer is able to take advantage of more time for researching the title, inspecting the home and even comparing properties. This is often considered to be the ideal time by many real estate experts for purchasing a foreclosed property. Another advantage associated with buying a foreclosed property is that you can avoid some of the competition and may even be able to exercise some negotiation regarding the price.

There are also some disadvantages that can be associated with buying a foreclosed home as well. One of the most serious drawbacks is the possible condition the home may be in. There could very well be repairs that may need to be made to the home. In addition, you must consider possible maintenance costs; all of which can put a dent in any savings you might incur from buying a foreclosed property. You must also consider other possible expenses, such as fees, past due homeowner's fees and tax liens that could be associated with the property. While you might think that the property would be completely free of liens that is not always the case. You should also consider property taxes, which may be a very real concern. If a homeowner has defaulted on the loan, they most likely have not paid the property taxes either.

It should also be understood that when a property goes into foreclosure and is auctioned off, you must be prepared to be the top bidder in order to buy the property. There may well be several interested bidders who are all vying to purchase the property. This means that while it is possible to be able to purchase a home only for the amount that is owed on it, if there are numerous interested parties you could see the price quickly begin to escalate and it is possible that the price of the property could exceed what you had planned to pay for it.

If you do win the auction, you should be prepared to likely need to pay cash for the total amount of the winning bid. In some cases you may be able to arrange time to obtain funding from a bank, but that time is usually limited and you may still need to pay a percentage of the full price in order to hold the property for a specific period of time. If you are not able to come up with the money within the allotted amount of time, the property will go back on the auction block.

Overall, buying a foreclosed home can be a smart investment, provided that you understand the advantages as well as the possible disadvantages that can come along with such a purchase.



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