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The Pros and Cons of Buying a Foreclosure
We've all been there. We find the house of our dreams only to put in an offer that is rejected, or worse yet, we lose out on a bidding war. We get passed over repeatedly, and we start to lose hope that we will ever find a home to call our own.
Just because that is the traditional way to buy a home does not mean it is the only way. A foreclosure can be a great alternative to getting your foot in the door of your dream home. But what is a foreclosure, and can it work for you? Below you will find the pros and cons of buying a Foreclosure.
What is a Home Foreclosure?
A home can go into foreclosure when a homeowner fails to make payments on their house. There are various reasons this can happen, from income or job loss, marriage separation, illness, and even other debts.
When homeowners can no longer pay for their home, the mortgage lender seizes the borrower's property. That property has now become available once again. But while one homeowner's troubles can be your fortune, there are a few advantages and disadvantages that you should be aware of.
The pluses and minuses will also greatly depend on what stage of foreclosure the home is in. So, let's break it down and go over each of the pros and cons for the different types of foreclosures you can expect to come across in your house-hunting adventures.
A home is in pre-foreclosure when the owner has fallen too far behind on mortgage payments, and the lender has advised them that they will begin the foreclosure procedures. In this instance, the homeowner can still avoid foreclosure and want to sell their home quickly.
The Pros of a Pre-Foreclosure
- The homeowner wants to make some of the money back they put into the house and may sell their home at a much lower price.
- You can do a title search to see if there are any red flags legally with the property.
- You will still have time to inspect the house to determine if any repairs need to be made.
The Cons of a Pre-Foreclosure
- The home is not officially listed for sale. You may have to do some research by looking at a website specializing in foreclosures like RealtyStore.com. You can also check your newspaper's real estate section under foreclosures or use a realtor specializing in foreclosures.
- You will need to get approval from the mortgage lender to pay less than what the owner owes and any closing costs.
- The homeowner is still living in the home, and you will have to wait to move in.
This type of foreclosure aka "Home Auction" is when the lender has officially seized the property. There will be multiple bidders, but the cost will still be below market value. Want to learn more, check out How Does Buying A House At An Auction Work?
The Pros of a Home Auction
- The bank cannot legally ask for more than what is owed on the mortgage, so you will still get a great deal.
- You may experience less competition than a traditional bidding war.
The Cons of a Home Auction
- Payment is usually one of two options; the winning bidder must pay the total price upfront or leave a considerable deposit and pay the remaining balance within 30 days.
- The house is purchased "as is." There is no disclosure as to the state of the house; therefore, home repairs could be quite expensive.
- You will take legal responsibility immediately and cover all liens placed on the property. Once you purchase the property, it means you will be legally responsible for paying for any back taxes owed, outstanding repair work payments.
- Lenders will not finance this type of foreclosure purchase; no mortgage means being ready to pay in cash.
In some cases, a property becomes Real Estate Owned by Lender or REO. Bank Owned properties can happen when a bank doesn't feel the home will fetch a fair price at an auction (or it already failed to do so), so it buys the property itself. The thing to know is, banks typically are not in the business of managing properties, nor do they want to be.
The Pros a REO/Bank Owned Foreclosure
- You will have time to inspect the home before you put in an offer.
- Once again, the prices are low and negotiable.
- You can have a traditional mortgage.
- Because you are buying from the bank, you won't have to worry about paying any back taxes owed from the previous owner.
- The house will be empty, and you can move in straight away.
The Cons a REO/Bank Owned Foreclosure
- The owner, that is, the bank, will not make any home repairs to the house unless it is a legal requirement.
- There is a lot more paperwork involved, which can slow down the process.
- The bank can be slow accepting offers, and therefore, the sale will take longer to go through.
If you have been struggling to get into the housing market, then buying a foreclosure home may be the ticket you need. While it does come with its risks, you don't have to go it alone. Working with a realtor will make all the difference and allow you to have the right expertise in this fun but challenging venture.
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