Why you should, or shouldn't, buy a foreclosureHome buyers may be able to get deals on foreclosures, which are often discounted in price, but buying foreclosures can be risky. It's essential to understand the pros and cons of buying a foreclosure before making a purchase.
First of all, there are several types of properties that are generally known as "foreclosures." A "pre-foreclosure" is a home which is in danger of falling into foreclosure, but is still owned by the homeowner. A "foreclosure" is a property that will be sold or repossessed by a creditor or a lender to recover the amount owed on it.
While pre-foreclosures are available for purchase from a homeowner, foreclosures can be bought at auction or as "bank-owned properties" (also known as "real-estate owned" properties) from a lender.
You may be able to purchase a home at a lower-than-market-value price. If the home is in pre-foreclosure, the homeowner is looking to sell the home to avoid going into foreclosure. These homeowners are usually in a hurry to sell, putting buyers at an advantage.
Banks are also often willing to offer foreclosures at a discount -- the longer they hold these properties, the more it costs them in terms of taxes, maintenance, etc.
Foreclosures can be found at all sorts of price points (starter homes, luxury homes, etc.) and sometimes are only in need of minor repair or upgrades.
With some sweat equity, repairs and upgrades, a homeowner can turn a foreclosure into a home and see some appreciation in the property's value.
Since foreclosures are often offered at significant discounts, you may face steep competition and bidding from other buyers.
Foreclosures aren't always offered at a large discount. Homeowners in the pre-foreclosure stage may price a home higher than it is worth in the hopes of paying off a mortgage, taxes, etc. Banks are looking to recoup at least what's owned on the house, so they may only offer a slight discount.
If you are buying a foreclosed home at an auction, you may have to pay cash (the same day!) and may not be able to inspect the home before purchase.
Some lenders don't offer loans for distressed properties.
Foreclosures may need serious and costly repair. The previous owner might not have been able to afford fixes for the property and may have allowed it to fall into disrepair.
Foreclosures are often vandalized and looted; it's not uncommon to find major appliances missing, holes kicked in the walls and other vandalism.
Foreclosures tend to sit vacant for periods of time, which causes major maintenance issues. If a home is not maintained, its pipes could freeze, vermin and bugs could settle in and mold could grow.
You need to do your research -- a foreclosure can have liens attached to it. You may find yourself having to pay costly old debts associated with the property.
Foreclosures often are sold as is and banks often aren't interested in making or footing the bill for repairs.
At times, foreclosure buyers have to start eviction proceedings and pay legal fees to get the previous tenants/owners out of the home.
Purchasing a home from a lender can be a lengthy and time-consuming process that's full of red tape.
Foreclosures can offer big bargains, but buyers need to be careful that they don’t get over their heads in purchasing a home that may need more repairs than they bargained for.
Foreclosures are usually sold as-is, and homes that are left vacant standing too long can have a lot of maintenance problems.
Real estate experts suggest buyers consider the following questions:
1. How long has the home been vacant? Be cautious of a foreclosed home that has stood vacant for more than a few weeks or had its utilities shut off a long time. Marvin Goldstein, a home inspector for many foreclosed properties, says a home can deteriorate quickly when heating, cooling, electricity, and running water have been turned off for awhile.
2. How old is the home? Goldstein says that homes that are more than 50 years old may have a failing plumbing system or inadequate electrical wiring.
3. How does the home look? Are there broken windows, gutters hanging down, or damaged siding? “Trust your instincts. If the house looks bad from the outside, it's probably worse than you think,” Goldstein told The Oklahoman.
4. Is there anything missing? Sometimes former owners remove anything of value from the home, such as built-in light fixtures, bathroom tile, water heaters, air-conditioning units, and hardwoods, says Bill Jacques, president-elect of the American Society of Home Inspectors.
Housing experts encourage buyers to get a home inspector to look at the property, even if it is sold as-is, so that home buyers know any repairs needed and cost estimates before they purchase the home.
“Buying a bank-owned home gives you the opportunity to enter the market at a very low price level,” says Dorcas Helfant, a past president of the National Association of REALTORS®. “You can find terrific values among foreclosures, especially if they're not in too bad shape. But, remember, these houses are discounted for a reason.”
Know When Buying a Foreclosed Property
If you're pursuing purchasing a foreclosed property, there
is a lot you should know if you have never done it before. Yes, there are tons
of great deals to be had in the market these days, but there are different
stages of foreclosure and the more you know, the more you can protect yourself.
This is when the homeowner still owns the property and knows
there is potential for foreclosure. They're likely not current on their
payments and are in danger of destroying their credit and losing any equity
they have. Buying at this stage is tough - the sellers may be on a deadline and
things have to happen quickly. The sellers will be extremely motivated and may
work out a short sale if the bank allows and they can find a buyer fast enough.
option is to buy at auction.
This should be approached with caution - there is a lot of
risk such as liens on the title and unknown repairs. Also, cash is typically
required on hand at this stage if you beat the bank's bid and win the auction.
chance to get these great deals is post-foreclosure.
At this point, the home is known as REO - real estate owned
property by a bank or lender. The bank won at the auction and is now selling
the home to recoup as much money as possible - at least what is owed on the
property. The bank will likely hire a local real estate agent to put it on the
market. The longer the home is on the market, the more willing the bank is to
work with you on selling price. Keep in mind, banks do not enjoy the business
of owning real estate – they want to get rid of it as quickly as possible.
A few things to keep in mind when purchasing a foreclosed
Get a full approval from a mortgage lender who has verified
your income and assets. This will give you more negotiating power.
Pick a zip code you are interested and do research on what
homes are selling for and the recent trends with property values in that area.
Get an inspection done and make your offer contingent on satisfactory
result from the inspection.
Determine potential repairs and their costs.
Remember you have the upper hand in negotiations with
regards to the bank paying closing costs and making repairs.
To find foreclosures, you'll want to work with an experienced
real estate agent who has access to local multiple listing services and can
pinpoint the potential deals for you. Be cautious and patient in the process of
buying a foreclosure. If done right, you will find a great home in which you
may have some instant equity.
Buying HUD Homes
HUD Home Store is the
listing site for HUD real estate owned (REO) single-family properties.
This site provides the public, brokers, potential owner-occupants, state
and local governments and nonprofit organizations a centralized location to
search the inventory of HUD properties for sale. In addition, registered real
estate brokers and other organizations can place bids on behalf of their
clients to purchase a HUD property. HUD Home Store also
includes many informative user-friendly features providing advice and guidance
for consumers on the home buying process. Frequently Asked Questions (FAQs) are
available online for:
Real Estate Agents
Members of the Mortgage Industry
Nonprofit Organizations and
What is a HUD Home?
A HUD home is a 1-to-4 unit residential property acquired by HUD as a result of
a foreclosure action on an FHA-insured mortgage. HUD becomes the property owner
and offers it for sale to recover the loss on the foreclosure claim.
The following information is provided as an introduction to the
process through which HUD homes can be purchased. You can either scroll down
the page, or access specific topics through the following topic menu.
Additional links provided in the menu to the right provide access to FHA
program and policy information for homeowners, homebuyers, and members of the
mortgage lending and real estate industry.
Buying a HUD Home
FHA Special Discount Sales Programs
Available HUD Properties
Buy a HUD Home?
Anyone who has the required cash or can qualify for a loan
(subject to certain restrictions) may buy a HUD Home. HUD Homes are
initially offered to owner-occupant purchasers (people who are buying the home
as their primary residence). Following the priority period for owner occupants,
unsold properties are available to all buyers, including investors.
Should I Get a Home
HUD does not warrant the condition of its properties and will not
pay for the correction of defects or repairs. Since the new owner will be
responsible for making needed repairs, HUD strongly urges every potential
homebuyer to get an inspection from a licensed professional home inspector prior to
submitting an offer to purchase.
If you are interested in acquiring a HUD Home that is in need of
repair, you may be interested in applying for an FHA 203(k) Rehabilitation Loan. When a
homebuyer wants to purchase a house in need of repair or modernization, the
homebuyer usually has to obtain financing first to purchase the dwelling;
additional financing to do the rehabilitation construction; and a permanent
mortgage when the work is completed to pay off the interim loans with a
permanent mortgage. Often the interim financing (the acquisition and
construction loans) involves relatively high interest rates and short
amortization periods. FHA's 203(k) Rehabilitation Loan is
designed to address this situation. The borrower can get just one mortgage
loan, at a long-term fixed (or adjustable) rate, to finance both the
acquisition and the rehabilitation of the property.
HUD does not provide direct financing to buyers of HUD Homes.
Buyers must obtain financing through either their own cash reserves or a
mortgage lender. If you have the necessary available cash or can qualify for a
loan (subject to certain restrictions) you may buy a HUD Home. While HUD does
not provide direct financing for the purchase of a HUD Home, it may be possible
for you to qualify for an FHA-insured mortgage to
finance the purchase.