For the frugal-minded home buyer, purchasing a foreclosed-upon house may seem like a no-brainer. Houses go into foreclosure when the owner cannot make payments, and the bank simply wants to cut its losses for as much as it possibly can, usually at a price below the market value for the home. With the implosion of the American housing market, there has been a huge increase in foreclosed homes in the past few years, a boon to prospective homeowners and investors.
But it isn’t always. While it is possible to get a great bargain on a house by purchasing a home that the bank essentially owns, there are a great number of possible pitfalls, as well. Here are some of the unique issues that you might have to face as the new buyer of a foreclosed home:
1. The home will be sold “as is.” Unlike a traditional home purchase, you can’t necessarily expect a foreclosed upon home to be well maintained. It takes some time for homeowners to default on their mortgage, and generally their finances have been strained for some time prior to the foreclosure. That means they may not have had the funds necessary for maintenance. Also, there have been some (relatively rare) instances of “foreclosure rage,” wherein the defaulting owner leaves the house a mess for the bank and new owner. Once the home is bank owned, the bank may not spend its money on repairs, no matter how badly they are needed. This also means that you cannot expect to get any money from the bank toward necessary repairs (though you can sometimes negotiate for a lower purchase price).
When buying any home, you owe it to yourself to get a home inspection, but it is particularly important when purchasing a foreclosure. The inspection will give you a clear-eyed view of how much work you are getting into by taking over the home.
2. There is a great deal more red tape and paperwork than in a traditional sale. Closing on a foreclosure could take a great deal longer than you might expect if you have only ever made traditional home purchases. First, the bank does not have the same motivation to close quickly that a homeowner does, as it does not need to move in time for the next school year or to avoid carrying double mortgages. So your closing may be held up by a backlog of foreclosures sitting on a bank manager’s desk. Second, it’s vital that you take the time to investigate all liens on the foreclosed property. While this will protect you from nasty surprises (like owing back taxes!), it also lengthens the process of purchasing the home.
Due to the possibility of liens, it is vitally important that buyers of foreclosures acquire title insurance to protect themselves.
3. Remember that the word foreclosure doesn’t mean bargain. Depending on the circumstances behind each sale, you may not be getting the steal you may think you are. Banks want to recoup as much money from the sale of the house as possible, so they will not let the house go for a song if they can help it. It’s important to research the houses in the surrounding area to know what the market value is and if the area has become depressed due to high foreclosures. It’s also important to factor in the cost of repairs and catching up on deferred maintenance into the amount you save by buying a foreclosed home.
Purchasing a foreclosure can be a path to home ownership that will save you money, but it’s vital that prospective buyers keep their eyes open throughout the process.