Foreclosure is when a homeowner defaults on their mortgage, either because they couldn’t make the payment or stopped making payments. Banks will repossess these homes and then put them up for sale at an auction to be sold to the highest bidder.
As an investment, many people see value in buying foreclosed homes at the lowest price and then reselling them for a good profit after renovating the house or doing a few repairs. Some buyers go all out and add all the bells and whistles, while others just make sure that the house gets a new coat of paint and all the essential parts are working.
For example, if the foreclosed property needs to have its garage door fixed, they can call in repair experts. If the roof needs repair, they also go to the local professionals for help.
To put it simply, they’ll make more money by selling a house that’s been spruced up and ready to be lived in than just leaving the property in just the same state.
Advantages of Buying a Foreclosed Home
- Foreclosed homes are usually sold at a discount because the bank wants to unload them as quickly as possible. Take advantage of the foreclosure period and negotiate a lower price.
- You can get a lot for your money when you buy foreclosed homes. Many homeowners stop paying their mortgages when they lose their jobs or the value of their property has dropped to a level that is less than what they owe on it. This implies that many foreclosed houses will require significant renovations before they may be occupied again. You can always budget to complete these renovations after you buy the property.
- One of the hidden benefits of buying foreclosure properties is that many come with a warranty (the former owner has already paid for most repairs and maintenance). This means you can live there without having to make a lot of repairs.
- Find a home that needs minimal renovations, and you could save a lot of money. Many foreclosed homes have problems with their roofs, plumbing, heating systems, or electrical wiring. Some banks will not even offer warranties on the properties they sell at foreclosure auctions because of the amount of work it would take to complete them all. In most cases, the bank will sign in front of the property that urges bidders not to bid if they plan to tear down the house.
Disadvantages of Buying a Foreclosed Home
- One of the disadvantages of buying foreclosure homes is that banks usually take longer to complete paperwork, making it more difficult for you to buy a home. Some banks won’t let you have a loan unless you have 20% of the house’s total value as a down payment. If you cannot afford to pay that amount of money, then you may not be able to purchase a foreclosure property even if one comes up for sale in your neighborhood.
- Foreclosure properties are often sold as is with no warranty. Suppose the property has been unoccupied for an extended period. In that case, you may have trouble making it livable in a short amount of time because the plumbing, electrical wiring, and heating systems may be busted.
- There have been cases where foreclosures were sold at auction to an individual trying to get revenge on the homeowner. That person may have no intention of restoring the home or paying property taxes, thus forcing you to do so if you buy it from them.
- Another disadvantage is that the price is usually non-negotiable when buying foreclosure homes because they are sold at an auction where everyone pays the same price for a house.
Foreclosure scams to watch out for:
- In some cases, a person will buy a foreclosed home and then contact the former owner saying that they can get it back from the bank if they pay them money.
- You may also be approached by someone who claims to have a house for sale at a great price, but it is not listed as foreclosed when you look in the public records. They ask you to pay in cash, and they will deliver the house to you. These sellers may be legitimate, but many of them are also scammers who use fake properties to get your money.
Final thoughts on purchasing foreclosure properties
- Make sure you give yourself enough time to look for a foreclosure property to buy, especially if you are looking at several houses at once. If you do not have the money available immediately, then begin saving up so that you can put down a sizable security deposit when buying it.
- Make sure that the house is worth what the person asks before you buy it. You do not want to lose your down payment because the home was overpriced and needed many repairs.
- Always check public records and visit the bank to make sure that they own the house and will be selling it at auction and that there are no liens on the property before buying it.
- Understand that foreclosure properties are often sold as is with no warranty or support from the bank, so you may have to make extensive repairs if the house is in poor condition.
Buying a foreclosed property can save you a lot of money, especially if the house is in poor condition and needs major renovations. However, be sure to check all the details thoroughly before you buy it, or else you may end up losing money or having to make several repairs for it.