Photo by Jeff Turner (Repres)
Buying foreclosed homes has become a much more common practice among those looking to own a house. With September marking a monthly record number of home foreclosed upon, foreclosures are making up a large portion of the total available properties for sale and an increasingly enticing option for potential buyers.
Further, the current housing market is presenting one of the best times for buying a home in general. A combination of extremely low mortgage rates along with floor-level home prices means anyone who can actually afford to buy right now will likely get a huge deal. That’s why you might want to consider buying a foreclosed home as a way to get the most house for the least amount of money.
Of course, there’s a lot of research and weighing of options that needs to occur before you decide one way or the other. A foreclosure purchase doesn’t work exactly the same way as going the traditional route and a there’s host of risks and dangers of investing in foreclosures to consider. Before you commit to buying a foreclosed property, here are the major pros and cons of doing so for you to think over.
Advantages of Buying Foreclosed Homes
Buy Below Value: This is the big reason most people become interested in purchasing foreclosure properties in the first place, though don’t expect the same kind of discount as in years past. Stats from RealtyTrac show that as of June, the average foreclosure sold for 27 percent less than its value, which is down 33 percent from the same time last year. Even so, paying three quarters of what a home is worth is still a significant reduction.
Pay Off With a Mortgage: Even though the process of buying a foreclosure is different from purchasing a regular home, you can still take out a mortgage loan to pay for the property. The best part is since you will (hopefully) pay less for a foreclosure property than a new home, you will borrow less and end up with smaller monthly payments. Combine that with already low mortgage rates and you’re looking at quite a deal.
Drawbacks to a Foreclosure Purchase
Even though it’s possible to buy a foreclosed property well below its value, that doesn’t necessarily mean you’re going to get the best deal or avoid major costs. Sometimes homeowners are better off buying a new home instead.
No Warranty: When you buy a new home, you’re protected by a builder’s warranty in case anything goes wrong when you move in. This isn’t the case with a foreclosure, which is sold as-is with no cause for recourse if the home has defects. Also, the home has been lived in already, perhaps for many years, and is more likely to have issues that won’t be discovered until you’ve moved in. You could be unlucky and end up with a “fixer-upper” when you had no intention of purchasing one.
Possible Liens: Understand that you’re purchasing a home which the last owner couldn’t afford to keep. In addition to maintenance and repair costs, this person may have also neglected expenses like income and property taxes, contractor payments or loans against the home. In this case, a lien may have been placed against the home which becomes your responsibility once you’ve purchased it. Performing a title search before committing to buying a foreclosure can uncover any liens.
Ethical Considerations: You must realize that when you buy a foreclosed property to get a good deal, you’re profiting from the misfortune of another person. Your home used to belong to someone else, maybe a family, who had it taken away due to financial hardship. Sure, you didn’t cause them to default on their mortgage and someone will buy the home anyway, but you’ll still have to decide if the above facts will weigh heavily on your conscience.
In truth, there are probably a lot more risks and drawbacks to purchasing a foreclosed property than advantages. Even so, considering the rate at which homes are being repossessed and foreclosed upon, you very well may find your dream home at a foreclosure auction. If you’re set on buying a foreclosure property, be prepared to put a lot of research, and possibly a lot of extra money, toward the home you want.
