In the aftermath of the 2008 recession, many homes were foreclosed on. Even when the economy is stable, foreclosures are an unfortunate fact of life. Sometimes, you can get a significant discount on the typical property price if you are willing to buy a property from a bank. The question is, is it worth it?
So what is a foreclosure property? Foreclosure properties have been seized by the respective bank, or mortgage company due to the current owners defaulting on their mortgage. Because the bank doesn’t really want to own property, it will then sell the property, often below market value of a similar-sized/located home.
A major risk with purchasing foreclosed properties is that they’re sold “as-is”. This can mean that there is damage that you will have to repair. Worse, it could mean that the two-car garage you love is actually on the property line and you need to pay for an encroachment agreement, which can run you thousands of dollars. You will certainly have to pay for your own survey to find out where the property lines actually are.
With that risk in mind, make sure to get a home inspection if it’s at all possible. You don’t want to buy what looks like your dream home, and then find out about the mold that’s going to cost tens of thousands of dollars to remove.
Often foreclosure homes have been neglected and empty for weeks or months, which means that there can be strange smells, stale air, and other undesirable environmental factors. Unfortunately, this can make it a little hard to tell if there’s something wrong with the house or it just needs a good airing out.
The other thing to be aware of is financing. While the property may be a deal, it can be difficult to get financing, as the size of a loan you can get really depends on the appraisal price. For a house that’s been empty for months or years, with accumulated dirt and neglect, the appraisal price can be pretty low, and lenders will rarely give you a loan if the appraised price is lower than the purchase price. There are a few common types of home loans, including FHA, 203K, and VA loans. These common notes typically require very little money down compared to conventional loans, as little as 3.5% down in some cases as opposed to 20% in a conventional loan. However, these loans are contingent upon homes meeting certain and specific restrictions, like types of flooring, age of home, and other physical aspects. This is a big factor when deciding on your home purchase, because it ultimately affects how much you have to pay up front.
Foreclosures can also have major advantages over purchasing a new home. First of all foreclosures often have an opportunity for a below market purchase price. The seller may also be open to helping with closing cost credits which can potentially be a big savings. Instant equity is another great benefit to buying foreclosure property. This means that when you buy the property it is already worth more than you paid for it, so you have “equity.” You could then sell the home for a profit. You could also make improvements to the home by making repairs and upgrades in order to raise the value above your invested monies to sell for profit. This technique does, however, take careful research and consideration in order to have success in making money rather than losing it.
The bottom line is, foreclosure properties can be a great deal, but they are something buyers should take their time on in making a decision. Be a bit cautious and do your due diligence when buying. Getting advice from a licensed real estate agent, a home inspection, and a survey are all good steps to take before you decide to invest in one of these homes.