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Get Prepared to Buy a Foreclosure
If you’re a buyer considering a foreclosure purchase, Weather to live in or to fix and sell, be sure you’ve evaluated the advantages and disadvantages of this type of transaction first. Things like how much will it cost to repair if it needs it? How long will it take? If you are thinking of moving into it do you have a place to stay while it is being renovated? Can you afford monthly costs on it, and the place your staying while it is being renovated? Etc. Buying a foreclosure requires careful budgeting, the right real estate team, and the mental resolve to see the purchase through.
Let’s go through some of the Pros of Buying a Foreclosure
The primary reason to consider purchasing a foreclosure is the potential for a great deal. What defines that deal? The foreclosing lender typically doesn’t want to hold on to the home and may be willing to offer the property at a discount to get it off their books, after all too many foreclosures on their book, could become a problem for them. HOW EVER this is only HALF of the deal, obviously if it costs more to fix up than it is worth, is it worth it? It maybe if you are planning on living in it; Maybe even if you are renting it out. So let us break this down some, and look at some scenarios..
Those willing to take the risk to buy a foreclosed house can most certainly use a home’s foreclosure status to their advantage, for example, buying a larger property or in a more desirable neighborhood than otherwise may or may not be possible. You can certainly find foreclosures in every price range – from starter houses to luxury mansions – and occasionally the property is in great condition, ready for you to move in and make it your home, and everything in between, even down to the ones that have a bad mold issue, up to the move in ready ones.. .
Let’s face it in the best case scenario buying a foreclosure is also financially advantageous since the price you paid is normally below market rate, and can give you built in equity. If the value of the home appreciates and you decide to sell, your investment could return even larger gains. Provided what you invested in it to make it habitable does not exceed what it will apprise for after the dust settles.
Make it yours
Means you saved on the house, and if you have some extra cash, you can add that custom kitchen or bath(s) you always wanted, or add that man cave you been dreaming about, and truly make it your home if you choose to live in it.
Cons of Buying a Foreclosure
The disadvantages of buying a distressed property, or foreclosed property can be many, and for some people outweigh the opportunity for financial gain, and instead of being a gain, it becomes a pain. The potential pitfalls will vary somewhat depending on your desired property’s current stage of foreclosure.
Overdue home repairs & 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, However not always the case, 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. They may also be mad at the bank and take it out on the house, like taking fixtures, putting holes in the walls, etc.
Homes that reach the real estate owned (REO) phase of foreclosure are often in the worst structural condition. Foreclosure is a lengthy process, it can take up to a year or more in some areas, so a REO property has likely been sitting empty for months or sometimes years with little maintenance or care.
The result is things like mold buildup, broken pipes, or stolen pipes, and vermin or bug infestations, possible squatters. Evicted homeowners might have sold valuable appliances or done deliberate damage to the home. Uninhabited houses can also fall prey to thieves and vandals. Which some times leads to stolen furnace, AC, broken widows, fires in the house, etc.
While in some stages you’ll have the opportunity to inspect a foreclosure property prior to finalizing the purchase, these homes are typically sold as-is; that means no repairs can be requested as a contingency of the sale. In addition, homes in the auction or REO stage of foreclosure will not include a seller disclosure, which would have alerted you to additional problems that a typical inspection might not uncover, such as lead paint, mold in the walls, bad or missing electrical, etc.
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, Mechanic leans, sewer leans, or home equity lines of credit. Take the time to understand the financial burdens you’re assuming above and beyond your mortgage obligation. Most of theses should be cleared off by the time you get to the closing table, but always run it through a title company to make sure you have no hidden surprises.
Current inhabitants can also become problematic if they refuse to vacate the property. Legal eviction takes time and money, and As stated before disgruntled previous owners or tenants could take out their frustration on your new home, and leave you with a lot to clean up and fix.
Red tape & no guarantees
The process of buying a foreclosure property can be a long and frustrating one, depending on the mortgage company, and the complications you run across.. Expect extra paperwork and slow response times, especially in dealing with HUD foreclosures. In the case of REO properties, it is not unusual to wait several weeks after making an offer to receive a reply either way, then you have the counter offers, and etc., some times it is not that long.. 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, attorneys to contact their clients, and any lienholders – to approve your bid. Occasionally it takes months to receive this approval.
While lenders do want to offload the property, many are also trying to get top dollar, after all no one wants to loos money in the banking business, just bad for business. Understand that your contract may be canceled for any reason and at any point up to closing. If a better offer is presented it’s possible to lose the home. If that offer is not written up correctly.
Conventional mortgage complications
Financing a foreclosure purchase can be complex and might require the use of non-standard loan products, such as Hard money lenders. Some lenders do not offer mortgages for distressed properties, so you’ll want to start by identifying those that do. CASH is always king in this case though.
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.
In the case of hard money lenders, most will loan up to 70% of the current conditions, or some may even loan up to 70% of the After Repair Value. How ever they are expensive, and Normally a balloon payment is due, after so many months.
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. The best way in my opinion is cash, and we at BMW Properties help people cherry pic the houses they are looking for, and often can get financing in place to help you.
Foreclosure properties attract a lot of interest because of the incredible value they can provide. In addition to other homebuyers seeking a primary residence, you will be competing with investors who often make all-cash offers. Often time they require 10% down at the time of the bid, and monies due with in the month.
Homes in the auction stage of foreclosure are particularly attractive to seasoned investors because they often present the best opportunity to acquire property at a significant discount. Those who are unaccustomed with investigating foreclosed homes or unsure of local property values might find it difficult to compete or worse, end up overpaying for an undesirable home, after all some investors will bid it up.
Should I Buy a Foreclosure?
Wondering if you are prepared to purchase a distressed property? Let us help you out some. If you can answer “yes” to each of these questions, buying a foreclosure could be a good choice for you.
Are my finances in order?
While buying a home in foreclosure can result in a favorable purchase price, the additional costs are often significant and should not be ignored when budgeting for your home purchase. Upfront fees to research foreclosure properties, construction and repair expenses, and the cost of any inherited liens add up quickly. Plus the cost of just holding the property, such as electric bill, water bill, insurance, and mortgage payments, etc.. Be sure you are financially prepared for expenses that are not rolled into your mortgage and think about leaving a cushion for any surprises that come up along the way. General rule for that in the cost of repair add 3 to $5K for hidden things in the wall, per say.
Do I have a team of professionals who can help me?
Working with foreclosure experts will help your distressed property buying process go much more smoothly. Consider Visiting our web site we have connections in the foreclosure market to help you locate potential properties, and can help you asset the property, also we have access to an attorney familiar with the foreclosure laws, in the Indiana area, we can also help you find an attorney in your area to review all paperwork, we also have reputable contractors, and we can also help to oversee any necessary home Repairs. We can help you avoid a lot of headaches, and relieve a lot of stress in the process of buying a foreclosed or distressed property, aftet all we will tailer make a plan for you.
Is my purchase timeline flexible?
Buying a distressed property is not like other home purchases. There will be starts and stops along the way, and the sale can fall through at any time, if all your ducks are not in a row. Homeowners in pre-foreclosure could come up with the money to put their loan back in good standing, although rare, but it could happen; a lender might be dissatisfied with the offers at auction and take full ownership of the home, potentially waiting months before offering it for sale as a REO property, this is pretty common.
When considering a foreclosure purchase, homebuyers should be prepared to act quickly, but not be in any particular hurry to complete the sale. If you have timeline contingencies for your purchase, for example the sale of your current home, a distressed property will be difficult if not impossible to buy. Again can you afford your current house payments, and keep it maintained, and take on a foreclosure?
Will I have somewhere to live if I can’t move in right away?
Depending on the condition of the property, significant work might need to be completed before you can move in to your new home, after all you have to have a place to eat, sleep, take a shower, keep warm, etc. . Even if the house is inhabitable, complete renovation of a kitchen or bathroom can make your residence unpleasant, especially if it has one bath. Think through where you will live while any necessary repairs are performed, if you plan to move into it.
In addition, sometimes a distressed property comes with previous owners or tenants who refuse to vacate the home. Legal proceedings to evict can be a lengthy process. Be prepared to wait it out somewhere else. This is the reason why a lot of investors choose vacant properties.
Am I up for the rollercoaster ride?
Buying a home at any stage in the foreclosure process is not simple. Be honest about whether or not you are prepared for the time and effort it will take to complete the purchase and get the house ready for move-in. There is always some unforeseen thing that pops up. Even us here at BMW Properties cannot see through walls, and catch everything, that is why it is good to have an extra 3 to $5K set aside. Although we do virtually eliminate all the surprises in buying a Foreclosure house..