Many home buyers look at foreclosed homes as potentially great deals. However, the reality is that buying a foreclosed house can come with downsides that outweigh the initial advantages. The following are some of the factors to consider.
What is a foreclosed home?
A home becomes foreclosed when the owner has fallen behind on payments and defaulted on the mortgage, leading to the lender taking the property. “Lenders, in turn, will try to recoup as much of their investment as possible by selling a foreclosed home for slightly less than it might be worth,” writes Jennifer Bradley Franklin for Bankrate.com.
The causes leading to the former owner’s non-payments can vary. It’s possible that credit card debt or medical bills have made it impossible for them to stay afloat. Alternatively, divorce, disability, bankruptcy or other unforeseen issues can be the culprit — or culprits. Whatever the reasons, they can have an impact on whether you ultimately decide to buy the foreclosed home.
Pros of buying a foreclosed home
There is, generally, only one major advantage to buying a foreclosed home: the price.
If a property is in pre-foreclosure — which is after the mortgage lender has notified the borrowers they are in default, but before the property is seized — the homeowners can try to sell the property themselves to avoid foreclosure proceedings and negative credit history effects. During this stage, homeowners do not have a lot of time and are likely to be in a difficult financial situation. They won’t have a lot of negotiating power and will usually sell the house for less than it is worth.
“Most foreclosures are sold at 5% below market value, at least, with even greater discounts in certain regions,” says Investopedia’s Troy Segal. He also adds that buyers can benefit even more after the property has been seized, because financial and public institutions don’t want to hold and maintain properties longer than necessary
Because the party in charge of the foreclosed home is trying to recoup its investments as quickly as possible, it can thus be purchased at a marked-down price that’s significantly lower than comparable property in the area. However, foreclosed homes are usually sold in “as-is” conditions, and that’s where you might find that the extra money left in your accounts isn’t enough to cover the long-term costs.
Cons of buying a foreclosed home
Compared to regular homes, foreclosed homes are typically poorly maintained. After all, if the owners could no longer afford their mortgage payments, they probably struggled to pay for upkeep as well. Additionally, owners can feel bitter about being forced into foreclosure and have been known to take out their frustration by damaging their home before the lender can repossess it. “This often involves removing appliances and fixtures, and sometimes even outright vandalism,” Amy Fontinelle writes for Investopedia. “After the occupants leave, foreclosures sit abandoned, often inviting criminal activity.”
Buying a foreclosed home could thus lead to large repair bills. You may have to deal with water damage, overgrown grounds, vandalism and lack of basic maintenance, among other things. Furthermore, lack of electricity, and thus lighting, can make it more challenging to properly assess the home before you purchase it. “Delinquencies such as back taxes and liens can add further costs to an otherwise desirable house,” Segal adds. “Whatever is owed, the government must first be paid and settled before the buying process can go forward.”
Should you buy a foreclosed home?
There is no catch-all answer to whether you should buy a foreclosed home. It’s a personal decision that will depend on many factors, including your tolerance to risk, the potential reward and your financial ability. If you move quickly enough on a good deal, it could be well worth the investment down the line.
No matter what you decide, if you ever consider buying a foreclosed home, you should always hire an experienced real estate agent, get an inspection and consult with your financial institution.
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