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Thanks to popular home renovation shows, the foreclosure market is more popular than ever. Add to that a recession where potential homeowners are looking for ways to save money. The lower asking point of a foreclosed home and its investment potential make these properties seem like a no-brainer. However, there’s more to purchasing one of these than TV lets on. The truth about buying a foreclosed home is much more complex.
1. Competition Is High
Buying foreclosed homes is a popular option, especially for entrepreneurs looking to invest in real estate, flipping houses for resale or as rental properties. Just among flippers, the competition is incredibly steep and can drive bidding or offers too high to make enough profit. Potential homeowners looking to live in the house will have to face this steep competition.
If you have your heart set on buying a foreclosed home, you may need to wait a while for the perfect property to become available. This market moves quickly, and bidding can send prices higher than you want to pay for a possibly damaged home. You may need to stick with your search for the long haul.
2. Usually Sold As-Is
Once you’ve found a property you’re interested in, you can’t just schedule a house tour like in a traditional home sale. At this point, the current tenants or owners are probably still living on the premises. In most cases, you won’t legally be able to view the home until the purchase is complete. This also rules out the option of getting a home inspection before closing.
Willingly accepting the as-is condition is part of the reason you’re getting such a good deal on the purchase price. The most you’ll likely be able to do is do a walk or drive by. If no one is living there, you might even get to peek in the windows, but don’t count on it. Odds are you’ll need to proceed with the purchase without knowing the layout, damages or property history.
3. Financing Is More Complicated
Paying for a foreclosed home can be a bit more complicated than a traditional sale. Many foreclosures are sold at auctions where you must pay in full with cash. Most potential buyers planning to live in the home don’t have this kind of money to burn. Homes that don’t sell at auction become the bank’s responsibility. Anyone can submit an offer, and the bank will move forward with the one that works best for them.
Private lenders often hesitate to finance mortgages for foreclosed homes because the damages are unknown and the risk is higher. You may need to look into alternative programs like Fannie Mae and 203(k) loans from the FHA.
4. Not All Liens Disappear
Once a bank takes ownership of a foreclosed property, they remove most of the liens against it. However, liens placed by the IRS stay with the home. With the competitive market and general lack of information available, it’s entirely possible you may not know about tax liens until you’ve finalized the purchase — these often don’t appear in generic title searches. You’ll need to have extra money set aside in case of this possibility.
5. Residents Might Not Leave Easily
Just because the home went into foreclosure doesn’t mean the sheriff arrives to escort the tenants off the premises. If the previous occupants don’t leave willingly, you’ll need to file a separate suit to have them evicted, which takes extra time and money. Another option many foreclosed home buyers end up going with is cash for keys — you offer the ex-owners money in order for them to leave the property.
6. Extended Timeline Can Cause More Damage
Logic would convince you that banks would want to unload these properties as quickly as possible. However, the timelines often move agonizingly slow. A backlog of offers, extra paperwork and complicated mortgage approvals can extend the timeline by months.
Longer wait times have a significant likelihood of increasing the damage to the property. If the previous owners are still living in the home, they may neglect to keep up with it or damage it on purpose out of anger or to sell what they can. It’s entirely possible to find the house stripped to the bare bones.
Vacant homes can also be problematic since no one is there to keep an eye on things. The foreclosed home could become a prime location for vermin, crime or squatters.
The Truth About Buying a Foreclosed Home Isn’t All Ugly
While everything on this list is a possibility you should prepare for, you also need to know sometimes foreclosure sales go smoothly. The truth about buying a foreclosed home is you need to be ready for anything. Have your ducks in a row financially, and trust the process. If you’re willing to put in the time and equity, you could end up with a great deal and an amazing property when all is said and done.