Buying a Previously Foreclosed Home: What You Need to Know
Sarah Davis, a financial advisor at Money Under 30, explains the risks and potential benefits of buying a previously foreclosed property. According to Davis, “Although buying a bank-owned property requires you to jump through a few extra hoops if the price is right, the money you save will be well worth your time.” That, in a nutshell, is the most significant benefit of seeking out foreclosures for sale when searching for your next home.
What Are the Benefits?
As Davis explained, foreclosures for sale can be one of the best ways to find a scorching hot deal in a challenging market for homebuyers. These homes are usually owned by banks who had to foreclose on a loan due to nonpayment from the mortgage holder. Oftentimes, these foreclosed homes are located in good neighborhoods and were simply purchased by buyers who underestimated their ability to afford the mortgage payments and upkeep. Of course, this should be a warning to all not to buy more house than you can afford. To reap the rewards of these great deals, you must do your research and due diligence so that there are no surprises.
What Are the Risks?
It is important to proceed with caution when seeking out foreclosures for sale. Dan Rafter, a financial expert at Wise Bread, urges buyers to research the foreclosure rates in the city where they plan to purchase a home and look specifically at each neighborhood. Foreclosures for sale can be a good way to purchase a home in a good neighborhood that might otherwise be out of reach. On the other hand, Rafter also argues that the neighborhood could be in a downturn, so it is important to research the city and neighborhood thoroughly.
Due Diligence
Just like any other home purchase, foreclosures for sale must be examined thoroughly in the due diligence process. Bank-owned properties are not necessarily maintained to high standards, so it is important to do an inspection prior to any purchase. These properties are sold “as is,” so you won’t be able to request that the bank do any repairs prior to the sale. However, you could use the condition of the property to your advantage when you negotiate a price. For instance, if the inspection report turns up major plumbing issues, that could either be used as leverage to negotiate a lower price or a reason to walk away from the deal entirely.
There are a few major issues that you should be especially cognizant of during the inspection. The roof is a major element that should pass inspection, and if it is not in good condition, or is near the end of its life, you should ask to renegotiate the price, or perhaps pass on the deal. Other areas to watch for are the plumbing and electrical systems, especially in older homes. Are there any leaks in the plumbing? This could be a sign of interior water damage or damage to the floors and walls. If it is an older home and the pipes are galvanized steel or cast iron, proceed with caution, because it is a sign that the plumbing has not been updated. The electrical system is another area to look at closely; this part of the house should be updated and up to current codes. Finally, look closely at the inspection report to see if there are any issues with the windows and foundation.
All of these issues may or may not be a reason to renegotiate the deal or simply walk away. But if there are major problems with the property, it could potentially cost you thousands of dollars, so make sure you consider that in your offer price. If you aren’t able to renegotiate based on the inspection report, do you have it in your budget to do the repairs? House renovations are not for the faint of heart, and quite often go well over the anticipated budget.
How to Find & Purchase a Foreclosed Home
Making an offer on foreclosures for sale requires the knowledge and assistance of a real estate agent who has experience in this area. In fact, Jennifer Bradley Franklin, a real estate expert at Bank Rate, advises getting an agent who is a Certified Distressed Property Expert. Equally important is having a preapproval letter from your mortgage lender, which will help the bank take you seriously as a buyer. It is essential that you separate yourself from the “lookers” so that your offer is considered among the other potential buyers. From the bank’s perspective, showing that you have proof of funds will allay any immediate concerns about your offer.
Just like buying a traditional property, you must do your preparation and research throughout the entire sales process. Using a site like HomeFinder will help you narrow down the search process so that you can begin researching cities and neighborhoods with foreclosures for sale. While there are certainly some risks involved, you could potentially find your dream home at a fantastic price that you would otherwise not have been able to afford. In short, if you plan ahead and do your research, the risk could be well worth it!
Resources:
https://www.moneyunder30.com/should-you-buy-bank-owned-home
https://www.wisebread.com/is-a-buying-a-foreclosed-home-ever-a-good-idea
https://www.bankrate.com/real-estate/how-to-buy-a-foreclosed-home/
https://www.discover.com/home-loans/blog/what-do-i-need-to-know-before-buying-a-foreclosed-home
