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Home > Real Estate Investment > The Disadvantages of Buying a Foreclosure

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.



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