Foreclosed Homes: How To Buy One And The Risks Associated

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Buying a house in foreclosure seems like a steal. You get a great deal, or at least it seems that way, but is it as good as it sounds?

Let’s dive into the pros and cons of buying a foreclosed house.

What Is A Foreclosure?

First, understand what a foreclosed house means. It’s a house the owners couldn’t keep up with the mortgage, so the bank took possession. The bank either sells the home off at auction or through a real estate agent.

The bank wants to make back what they lost, so the price is often much lower than the market value.

The Benefits of Buying a House in Foreclosure

  • Low price – Paying less than market value is a tremendous benefit. If you fix the home up within a reasonable price, you have instant home equity. If you’re flipping the home, you may make fast profits.
  • Less competition – Most buyers want ‘move-in ready’ homes. As an investor trying to make a profit, you may not care about that. You focus on profits and when there’s less competition, you have a greater chance of buying the home.
  • Room for profits – Buying a home at less than market value means greater returns, if you do it right. Fixing the home up, marketing it well, and asking the right price could lead to a decent return on your investment.

The Risks Of Buying A House In Foreclosure

  • The damage – If the homeowners couldn’t afford the mortgage, they probably couldn’t keep up with the home’s maintenance and repairs either. You buy the home ‘as is,’ which means all maintenance and repairs are on your shoulders (and pocketbook).
  • Immediate financing – Depending on how the bank sells the property, you may need financing immediately. Unlike a standard purchase, you may need a sizeable deposit right away and financing within less than a month.
  • Right of redemption – Some foreclosure sales still have the right of redemption period. If the homeowner can come up with the payment deficit, they can claim their home back. Knowing when this period ends is important when you buy a house in foreclosure.

Are Foreclosures Cash Only?

Most foreclosures aren’t cash-only, but banks give a shorter period to secure financing AND most banks won’t approve foreclosed properties.

Here’s why.

Banks need to know there is enough collateral in a home. Foreclosed homes are sold ‘as is’ which often means bad condition. If the value isn’t there – meaning the appraiser can’t appraise the home for enough money, they won’t close the loan.

This is why most buyers think foreclosures are cash only. There’s another option though – hard money loans. This financing option is great for foreclosures for two reasons:

  • It focuses on the property’s potential and not the borrower’s credentials
  • They finance quickly – sometimes in less than one week

How To Buy A House In Foreclosure

If you decide you want to buy a house in foreclosure, here’s what to do:

  • Get preapproved or know you can get financing. You’ll need it fast, sometimes immediately, so do the financing legwork first.
  • Pay for a property inspection. Even though you’ll buy the home as-is, you should know what’s wrong with it. You need these numbers to determine your profits and to see if the home is right for you.
  • Search the title. Some title liens become your responsibility if you buy the home. Know what you’re getting into before committing.
  • Buy the home. The final step is to complete the purchase, fix up the home, and flip it (or keep it) if you’ll rent it out.

It’s not a bad idea to buy a house in foreclosure as long as you pay attention to the smallest details. Know what you’re getting into; know what the lenders require, and make sure there are profits in the transaction.

Buying a house in foreclosure can be a great way to start or continue your real estate investments. Do your homework, know your limits, and buy homes that you can fix-up while making a profit.