The Disadvantages of Buying a Foreclosure
A study by the American Society of Home Inspectors reports that 2/3 of buyers
today would consider buying a foreclosure, although only 2% have actually bought a foreclosed
home. The appeal of buying a foreclosure for most people is that it provides the ability to
pay a far lower price while at the same obtaining a much higher value home. While that is definitely
an advantage to consider, it is also important to be aware that there can be disadvantages
associated with buying a foreclosure as well.
One of the most important elements that should be understood about a foreclosure
is that there are different types of foreclosure sales. Whenever a homeowner defaults and does not
make their mortgage payments, the lender has the right to file foreclosure proceedings within the
courts in order to collect on that debt. The lender may request the court to sell the property as
part of the foreclosure process. A government operated foreclosure sale is usually features an auction
in which the property is sold to the highest bidder. There is frequently a minimum starting bid in
the auction that is equal to the amount of money owed to the lender.
In the event the property is not sold at auction, the lender will then take possession
of the property. At this point, the lender may offer the property for sale. This could be 'as is.'
It should also be understood that in addition to the lender there may also be other
businesses or people who may have rights or interests in the property. Whenever the government sells
a foreclosed property at auction it is always the responsibility of the buyer to conduct a thorough
search to determine the current status of the property title. A home that is purchased through
foreclosure typically does not include title insurance in the same way that a traditional home purchase
would. There can be numerous situations in which others might have an interest in the relevant property.
For instance, a contractor might obtain a lien on the property if they are not paid for work that was
performed. There could be second mortgage on the property. There could also be tax liens present.
Another problem that can arise relates to repair issues. Most foreclosed properties
are sold 'as is.' This means there is not a warranty that will cover major problems that might require
expensive repairs. If you are considering a foreclosure, it is imperative that you have the property
thoroughly inspected in order to gain an idea of the condition as well as the true market value. You
should be sure to consider the cost of any repairs that are known and which will be required in order
for the home to be livable.
Keep in mind that a foreclosed home may not always be available for inspection prior
to inspection. While it is possible to obtain a great deal at a foreclosure auction, the risk is always
greater and there could be significant repairs needed in the home. If you make an offer on a foreclosed
property that is bank owned you might obtain the right to inspect the property and cancel the transaction
if there are unacceptable repair issues, but be sure to fully verify all terms of the contract before
you actually submit an offer.
Remember that since the prior owners of the property experienced financial difficulties
to the point that they actually lost the home, it is highly likely they did not keep up with repairs and
maintenance. This can result in minor issues such as carpeting that needs to be cleaned and walls that
need a fresh coat of paint to even more significant issues such as major system malfunctions and possible
roof leaks. There might also be abandoned possessions, furnishings and even trash that will need to be
removed from the home. Sadly, it is possible that the home might have even been damaged. In some cases,
when a homeowner loses their home through foreclosure they intentionally damage the property as an act
of resentment. There is also the possibility that the home might have been damaged as a result of sitting
vacant for some time. Abandoned properties are prime targets for theft and vandalism.
You should also be aware that the purchase of a foreclosed property requires you to make
payment for the full sales price immediately. Financing is not available, so you must be prepared to have
the full amounts of the funds available.
In spite of the disadvantages, it can still be worth buying a foreclosure property
at a price that is affordable, if that is a priority for you. You can minimize the possible risks by
researching the property as thoroughly as possible.