In 2008, an average of one in six homeowners owed more than their homes were worth. Over 2.3 million homes went into default or were seized by lenders. As bad as that sounds, there is a bright side. Foreclosure properties contributed to the 6.5% increase in existing home sales for the month of December especially in California, Nevada and Florida.
Purchasing a foreclosure property, whether it be a pre-foreclosure, short sale or bank owned real estate is not for everyone. You have to do your homework, get representation and be prepared. After this financial crisis, when the smoke clears, thousands of smart investors are going to come out ahead because they seized the opportunities that were available to them.
Here are some of the pros and cons of purchasing a foreclosure property:
Pros
- It's a great opportunity for getting a bargain on a home. Especially if you don't mind putting in a bit of work to fix it up. In some cases, properties have been sold for as much as 50 percent below market price.
- If you're looking a property at the pre-foreclosure stage, your bargaining power may be increased by the seller's sense of urgency. You can also request inspections and perform title research at this stage.
- Foreclosed properties can be lucrative investments as rental properties to be sold when the market picks up.
- If purchasing the property at an auction, required cash payments reduce the competition.
- If purchasing an REO (real estate owned by lender), the title will be clear and the buyer does not assume any liens or back taxes. REO's also allow inspections to be conducted within a pre-determined contingency period.
- Property is listed on MLS and the bank will pay the real estate commission.
Cons
- The condition of the home is always a concern. Some homes are missing appliances, have been vandalized, or poorly maintained. Take into account that there may be hidden costs associated with your purchase.
- If you're buying a house at an auction, it's generally offered "as is". Try to arrange a viewing of the property before the sale.
- Banks won't negotiate the sales price, but may take a lower offer if it contains fewer conditions.
- There is usually additional paperwork for an REO sale and depending on the stage of foreclosure can take longer than a normal sale. Short sales can take up to two months. You have to be patient, understand the process and go with the flow.
- In a pre-foreclosure situation, if the purchase price does not cover the mortgage and closing costs in full, the buyer may be subject to the lender approving the offer.
Foreclosure Auction
- In an auction purchase, the home must be paid for in cash, usually without a mortgage. As the buyer, you are responsible for title searches and would also assume any liens, back taxes and mortgages.
- If the bank thinks they won't get their price, they may buy the property at the auction.
- The buyer must pay for their own legal representation.
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