I am a first-time homebuyer considering a foreclosure. I don’t have much flexibility with my budget so this seemed like a good option. What are the pros and cons? How do I know if a foreclosed home is right for me?
Foreclosed & Confused
Five years ago, a home buyer could spot a foreclosed home a mile away. They were abandoned structures, stripped of all appliances and fixtures, with unkempt landscaping and falling down “For Sale” signs.
Today, banks often renovate their REOs (also known as bank real estate owned) before listing in hopes of selling to end users, not contractors or investors who will capitalize off the bank’s loss. To help you make a smart decision, here are some pros and cons for buying a foreclosed home in today’s market.
PRO: Foreclosures are still cheaper
Today, bank foreclosed homes are typically about five percent below a comparable house in the same location that is not a foreclosure. In previous markets, they were often in horrible condition and about 15 to 20 percent below market.
PRO: Home upgrades
Those willing to take the risk can use a home’s foreclosure status to their advantage, buying a larger property or in a more desirable neighborhood than otherwise possible. You’ll find foreclosures in every price range – from starter houses to luxury mansions – and occasionally the property is in great condition, ready for you to make it your home.
PRO: Financial gains
In the best scenario buying a foreclosure is also financially advantageous since the price you paid is below market rate. If the value of the home appreciates and you decide to sell, your investment could return even larger gains.
CON: Overdue home repairs and sub-standard property conditions
Homes in any stage of foreclosure may require significant repairs just to make them inhabitable. Pre-foreclosures are typically assumed to be a better bet in terms of home condition, but don’t forget that a homeowner is in pre-foreclosure because the owners could not keep up with their monthly mortgage payments. This might mean that they also did not have the funds to perform regular maintenance on the home or repair serious issues that arose during their occupancy.
With a foreclosure, you may not get much information from the sellers about the home’s history, and there are no disclosures about leaky roofs, mold or crime. And you are forced to buy the home “as is,” without any recourse if things go wrong. We definitely recommend running a Housefax Report. It can tell you if there’s been a reported fire, if the roof has been replaced, the history of natural hazards, and more.
CON: Inherited burdens
When buying a home in foreclosure you might become responsible for any debt connected to the home. You could be looking at significant sums owed for unpaid tax obligations, construction loans, or home equity lines of credit. Take the time to understand the financial burdens you’re assuming above and beyond your mortgage obligation.
CON: Longer sale process
The process of buying a foreclosure property can be a long and frustrating one. Expect extra paperwork and slow response times. In the case of REO properties, it is not unusual to wait several weeks after making an offer to receive a reply either way. If you’re buying a short sale you’ll be waiting on all parties with an interest in the home – including the current owners, the primary lender, and any lien holders – to approve your bid. Occasionally it takes months to receive this approval.
CON: Conventional mortgage complications
Financing a foreclosure purchase can be complex and might require the use of non-standard loan products. Some lenders do not offer mortgages for distressed properties, so you’ll want to start by identifying those that do.
A conventional mortgage will be limited by the appraised value of the property; this can be problematic for foreclosed homes as the state of disrepair can lead to extremely low valuations. Conventional loans also typically have requirements regarding the condition of the property and might not approve your loan without certain repair contingencies, creating a catch-22 since foreclosures are commonly required to be sold as-is.
Any delay in the acceptance of your offer can also impact financing. Most lenders have time limits on rate approvals. Waiting for a response could result in less favorable mortgage terms if your approval expires and rates increase.
Ultimately, buying a foreclosure is a personal choice you’ll have to weigh, considering your own circumstances. These pros and cons should at least point you in the right direction when thinking about whether a foreclosure is right for you. And when you’re ready, remember to get a Housefax Report and know before you buy!