Buying And Selling Homes
Buying a foreclosure property can be a good investment, but keep the possible risks in mind.

Potential Risks and Pitfalls to consider when you Buy a Property in Foreclosure



Buying a foreclosure property can be a good investment, but keep the possible risks in mind.
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"Potential Risks and Pitfalls to consider when you Buy a Property in Foreclosure"
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According to a 2009 study conducted by the American Society of Home Inspectors, two-thirds of us would consider buying a foreclosed home, although only two percent have actually done so.  The attraction of buying a foreclosure house is that you can pay a much lower price, and get a higher-value residence for your money than you can with traditional home sales.  However, you should be also be aware of the major downsides and risks to buying foreclosed property, which will enable you to weigh the pros and cons wisely, and be satisfied with your purchase.

~ Types of Foreclosure Sales

When a homeowner fails make mortgage payments, the lender can file a foreclosure proceeding with the court system to collect on the debt.  As part of foreclosure, the lender can ask the court to conduct a sale of the property and pay over the money that is owed.  Government-run foreclosure sales typically auction the property to the highest bidder, but often have a minimum starting bid equal to the amount owed to the lender, and perhaps including sums owed to others. 

If a property does not sell at the foreclosure auction, the company or person owed the debt often takes possession.  At this point, most banks or individuals will begin a process that leads to offering the property for sale, though different institutions have different policies.  The bank could offer the property for sale quickly with an “as-is,” no warranty sale, or might opt to inspect the building and make repairs before offering it for sale through a realtor.

~ Title Issues

Besides the lender that has filed for foreclosure, other people or businesses may also have interests or rights in the property.  When the government is selling a foreclosed property at auction, and with some bank sales as well, it is the foreclosure buyer’s responsibility to conduct the appropriate research to determine the status of the title.  A home bought through a foreclosure sale will not automatically come with title insurance, as most traditional home purchases would.

Many situations can lead to others having an interest in a property.  Contractors can obtain liens if they are not paid for work performed, and other banks may hold second or even third mortgages on a house.  Neighbors or utility companies may have paid for easements, which give them a right to certain uses of the land.  For these property interests to be enforceable against a later purchaser, notice must be given by recording the details with the title, which is the official government record of property ownership.

Another problematic situation that can arise is when the title to a property covers only the land itself, and the on-site building – typically a movable, manufactured or mobile home – is owned by another individual or company.  To ensure that the amount you pay at the foreclosure sale will get you valid ownership of both land and building, without having to make additional payments to others, you will need to research the title.  This involves reading and comprehending all the documents associated with the property that have been recorded with the local government agency, typically the county.

In addition, you should read through the court file to determine if others may have an interest in the property or be owed money that won’t be paid from the foreclosure sale proceeds.  It may be possible to do all this research yourself if you take the time to properly educate yourself about the process, or you could hire an attorney or other expert to research the documents for you.  

~ Repair Issues

Many foreclosure properties are sold “as is,” with no warranty to cover even major defects requiring costly repairs.  If you're looking at a foreclosure, research the grounds and structure to the best of your ability to get a sense of its condition and true market value, and consider the cost of any known repairs or purchases required to make the house livable.

Foreclosed homes may not be open for inspection before buying.  Although you can pick up some incredible bargains at foreclosure auctions, your risk is higher that unanticipated, significant repairs will be needed.  Making an offer on a bank-owned foreclosure may give you the right to inspect and cancel the deal if unacceptable repair issues are found, but verify the contract terms carefully before submitting an offer.

Be aware that since the previous owners had money problems to the point of losing their home, they probably weren’t keeping up with maintenance and repairs for some time either. There could be anything from minor issues like dirty carpeting or walls needing paint to costly plumbing malfunctions or roof leaks.  The prior owners may have had to leave the home abruptly, and there may be abandoned furnishings, possessions and trash that will require removal, often left in a chaotic state of disarray since the residents’ lives were in turmoil.  Resentful people losing their homes may even intentionally damage the structure, or strip it of everything movable such as appliances and light fixtures. 

If the building has been sitting empty for some time, other issues can arise.  Vandalism or the theft of air conditioners and appliances occurs with some abandoned properties.  In humid climates, mold may grow on visible surfaces or even inside walls if there has been no air conditioner running.  In rural areas, wildlife ranging from bees, ants and snakes to rodents, raccoons and opossums may even move into the invitingly empty structure or overgrown yard. 

~ Financing Issues

Buying a property at a foreclosure auction requires prompt payment of the full sales price.  Financing isn’t offered, so you need to have funds ready to make a substantial lump-sum payment.  Banks are reluctant to lend money for the purchase of foreclosed homes precisely because of the issues described above.  If no warranty is offered, and no information is available on condition, the lender has no guarantee of getting its money back if you default on your loan.  The bank doesn’t want to be stuck with a seriously damaged building that can’t be sold to recoup its investment. 

With bank-owned properties, you can sometimes negotiate financing directly as part of the sale.  However, this may limit your options if you were planning to save money by doing repairs yourself.  Lenders typically insist on having work done by licensed contractors.  You could still save money by doing less-skilled tasks like painting and some minor repairs yourself but, regardless of your skill and experience as a do-it-yourself handyperson, your contract with the lender may require you to have certain repairs performed by professionals.

~ Delay Issues

Negotiating to buy a bank-owned foreclosure home can take longer than when a property is bought through a realtor or individual owner.  It usually takes bank officials 45-60 days to respond to an offer to buy a foreclosure.  After that, working out the terms and completing the paperwork may take several more months.  

When a property is purchased through a government foreclosure sale, some states impose a waiting period before the sale is final.  During this “redemption period,” the homeowner can come up with the money that is owed, and be entitled to reclaim the property.  The result for the would-be foreclosure buyer is that he or she is held in limbo, not knowing whether the sale will go through, and unable to pursue other options since the money has to be kept available in case the foreclosure sale does go through.

~ Price Issues

Although foreclosure homes can sometimes offer real bargains to buyers, prices can be inflated if the lender paid out more money than the property’s current market value.  Some banks haven’t faced the reality that the real estate market has crashed, so the value of their foreclosed property is much less today. The asking price for a foreclosed house may or may not be a good deal, so research the value of comparable properties in the area, and don’t assume that buying a foreclosure is always a good deal. 

~ Summary

Despite the downsides, it can be well worth it to buy a foreclosure property if an affordable price is a priority for you.  Minimize your risks by gathering as much information as you can about the condition and contents of the building, and about the title and any interests others may have in the property.  Hire experts if possible to perform an inspection, and research the paperwork, to save you from a potentially bad purchase. 

On the other hand, if your priority in buying a home is a sense of security from knowing in advance exactly what you’re getting, and having a warranty and title insurance to cover any hidden problems, a foreclosed house is probably not the best choice for you.  The traditional real estate market is also offering many good deals today which offer assurances that are simply not available with foreclosed properties.


Sources:

Buying a Foreclosure Can Cause Problems, Retrieved 09 15 10

Thinking of Springing for a Foreclosed Home? Check for These Five Problems First, Retrieved 09 15 10

More about this author: Christina Mendoza

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