Purchasing a foreclosed house can be extremely enticing, especially to homebuyers looking to strike a bargain. A foreclosed property usually sells for less than houses listed on the market and sold by real estate agents. Stories of property investors taking advantage of house bargains and making a huge profit flipping foreclosed homes are everywhere. Not surprisingly, some aspiring “homeowners-turned-investors” are jumping on the bandwagon and looking to earn money on this venture.
Buying a foreclosed home, however, isn’t simple. Although this move could save you money, you should know the limitations (and possible red tape) associated with this transaction.
Here are seven things you should know before you take the plunge:
The Number of Foreclosed Homes Is Falling
Treat foreclosed houses as diamonds in the rough. They’re becoming more difficult to find these days. According to a report published in PR Newswire, foreclosure activity and inventory are down in 2019. Interest in foreclosed homes, however, is up — making competition stiff. If you want to get your hands on a foreclosed property, you’ll have to search real hard.
Cash Isn’t the Only Option When Buying a Home in Foreclosure
The idea that you can only purchase a foreclosed house with cash isn’t necessarily true. You have to look at the property’s current foreclosure stage. Check whether the home is bank-owned, auctioned, or in pre-foreclosure.
If you discover that the property is in pre-foreclosure or the short sale process, you could finance your transaction with a mortgage. You could purchase a bank-owned home with a traditional mortgage or a renovation loan (if the property needs a major makeover).
When your credit score is less than stellar, don’t fret. You could buy a foreclosed home with an FHA loan. Do note that this government-backed mortgage is for owner-occupants and not house-flippers or property investors.
Purchasing a Foreclosed Property Through an Auction Isn’t Easy
If you do have cash, you have the option to buy a foreclosed home through a public auction. The process here is simple: the bank sells the property to the highest bidder. The home’s all yours if you win the bidding war.
Although a public foreclosure auction may appear as a convenient way to get the house you want, it does come with a few drawbacks. The competition in an auction is fierce. You’ll likely be outbidding seasoned real estate investors who have a lot of cash to spare.
If you’re lucky enough to outbid everyone, you’ll need to pay for the foreclosed property upfront. Your options are by certified check or cash.
Lastly, you can’t do inspections or perform other checks on the property. You get what you bid for, which isn’t a good thing if you end up with a house that needs major repairs.
You Buy the Foreclosed House As Is
Banks foreclose on a home when its homeowner is unable to make the required minimum mortgage payments. When these financial institutions put the property on the market, they’re already losing money. If they want to break even, they’re not going to spend money on fixing a foreclosed house. Instead, they’ll delegate the repair costs to the homebuyer.
You Need to Prepare for Repairs
Given that many foreclosed homes are in disrepair, you should make sure that you have enough funds to renovate or remodel the property. If you’re lacking the money to do these repairs, see if you could get a renovation mortgage.
Home Inspection Is Essential in Foreclosures
If you’ve decided to buy a house in pre-foreclosure, you should insist on home inspection even if the lender will sell the home as-is. Instead of doing the assessment yourself, hire a professional to get the job done. When you sign up for an expert home inspection, you get an in-depth report on the property. You’ll obtain a better picture of the house you’re buying. You’ll also receive the framework necessary to prioritize your repairs.
Note: If the home inspection reveals that the renovation work is too much or too costly, just walk away from the transaction. Spending a lot of money on repairs is not worth the time and the hassle.
Do Title Checks As Well
On top of an inspection, you should perform a title search on the property. Sometimes, the home may have liens attached to it. The title check will let you know the number of debts against the property along with the amount you have to pay.
Purchasing a foreclosed home is a huge deal. If you’re going to pursue this route, don’t be blinded by the affordable price. Study the buying process carefully, so you know if the house you’re getting is a bargain or a money pit.