When You Should Consider Buying a Foreclosed Home?

When You Should Consider Buying a Foreclosed Home

A foreclosed property may seem like an attractive investment for many new investors, but it comes with significant risks that must be taken into consideration.

Before buying a foreclosed home, it is important to estimate the risks and returns associated with the specific property.

It is important to understand how it can be financed and whether it should be used as a primary residence at all.

Many experienced investors are cautious when looking for a foreclosed home, but should inexperienced home buyers even consider a purchase of this type of a property?

What is a Foreclosed Home

Foreclosure is the legal process when a mortgage borrower fails to pay for their mortgage, so the lender has to take steps to recover the outstanding debt by selling the mortgaged property.

These properties are usually sold on a foreclosure auction where the highest bidder gets to purchase the property.

If the property is not sold successfully during the auction, the lender may try to sell it through a real estate brokerage or through their own network.

Government agencies also hold a portfolio of foreclosed properties that are listed on their websites.

Generally, foreclosed properties are sold at a discounted price because the main objective of the lender is to recover the outstanding amount owed rather than get the best price for the property.

On the other hand, the properties are usually sold “as-is”, which means that the seller is not obligated to fix the property before it is sold.

The “as-is” condition may bring a lot of risk for the buyer. If the property is damaged, and it requires a lot of capital to be repaired, the buyer will have to pay for it.

In this case, a property that is sold at a high discount may cost much more money to the buyer after the repairs are completed.

Who Should Consider Buying a Foreclosed Home

Foreclosed properties come with a lot of hidden risk. Each property may have different problems and may require a different amount of capital invested in order to pass a home inspection.

It might be difficult to estimate the costs required to fix a foreclosed property without understanding what to look for and how much each repair costs.

Because of that, new home buyers should avoid buying a foreclosed home even if the price looks attractive.

Even if a home buyer is experienced, it might be a good idea to look for other types of investments if the home buyer expects to withdraw the invested money rather soon.

A foreclosed home usually requires multiple long-term capital commitments, and it is not expected to make money or be used as a primary residence for some time.

Before the foreclosed property can be rented out or be used by the buyer, it must be repaired.

Some repairs may take a long time to complete, so it is expected that a foreclosed property will not be usable for some time.

An home buyer who has experience in the real estate industry, who knows the approximate prices for different repairs, and who has enough capital to commit long-term may be able to get a good deal out of a foreclosed property.

It is still important to conduct a home inspection and ask for legal assistance to ensure that there are no liens on the property.

How to Buy a Foreclosed Home

The following steps may be useful for both, experienced and inexperienced investors, to successfully purchase a foreclosed property for a good deal.

Get a Mortgage Pre-Approval

The owners of foreclosed properties want to sell their properties fast because their main objective is to recover the amount owed on that property promptly.

This means that they might not be willing to wait for a higher offer and instead sell the property to the person who can close the deal fast.

If a buyer cannot make a cash offer, then it is important to get mortgage pre-approval to increase the chances of closing the deal on the property.

Hire a Real Estate Agent Experienced in Foreclosures

Regardless of the amount of experience a buyer has in buying foreclosed properties, a real estate agent may help identify the risks and costs associated with buying a particular foreclosed property.

It is always more beneficial to go with a real estate agent who has experience working with the foreclosed properties because they can navigate the buyer through the process quickly, point out the drawbacks of a specific property and help a buyer make a competitive offer.

Pay for a Home Inspection

Home inspection is essential when buying a foreclosed home. When the property is sold “as-is”, the buyer has to bear the cost of home inspection.

Also, it is unlikely that the seller will agree to fix anything after home inspection is done.

In this case, home inspection plays the role of an estimator that provides a clear picture for the buyer about how much it will cost to fix the property.

If the cost of fixing the property is too high, the buyer can still walk away from the deal.

Pay for Legal Services

Foreclosed properties are more complicated than regular properties. Some properties may have outstanding liens associated with them.

Property liens are legal claims of debt that allow the debt holder to access the property if the debts are not paid. These liens are transferred with the property.

If a buyer purchases the property that has outstanding liens, then the buyer will have to pay for them.

A legal team may be able to identify all outstanding claims on the property, provide a description and estimate how much it will cost to clear the property of any liens.