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
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.