3 Reasons You Should Never Invest in a Foreclosed Home (And 2 Reasons You Should)

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U.S. foreclosure activity is on the rise.

According to a new report published by real estate data provider ATTOM, foreclosure filings — which include default notices, scheduled auctions and bank repossessions — increased by 28% in the third quarter to 124,539, Fox Business reported. Foreclosures are up 34% compared to the same time last year.

Buyers can typically get a better deal on foreclosed properties, but is it worth it? Here are several reasons you shouldn’t — and sometimes should — invest in a foreclosed home.

Poor Condition Can Be a Dealbreaker

Foreclosed homes are properties given up by owners who couldn’t afford the monthly mortgage payment anymore. If someone can’t afford their mortgage, it’s likely they couldn’t afford to keep up with maintenance.

Bank-owned properties can sometimes sit for quite a while. Empty homes can accumulate dust and dirt, and it also leaves them susceptible to occupancy by vagrants.

Depending on the property’s condition, you may have to do some repairs — or a massive renovation. In some cases, the previous homeowners’ belongings are still inside. Many real estate-owned (REO) properties have trash, furniture and other items that you will need to dispose of when you buy the home.

Problems Getting a Loan

You can finance the property with a mortgage, but whether you qualify may depend on the property’s condition. If the foreclosed property is in decent shape, the purchase could work like a traditional home purchase.

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If a traditional lender doesn’t approve the loan, you may want to consider a government-sponsored loan. For example, Fannie Mae’s HomePath program offers special financing to first-time buyers who want to purchase a foreclosed home owned by Fannie Mae.

Liens May Present Issues

It’s always a smart idea to get a title search when you buy a home, especially if you purchase a foreclosure.

According to ProTitleUSA, credit card and personal judgments, mechanic’s liens and second mortgages are removed after foreclosure — but those filed by government agencies often still stand. PropTitleUSA noted that if you purchase a foreclosure and contact the entity holding the lien to explain the situation, they may be able to reduce or remove the lien held against the property.

Lower Sales Price

A major reason people choose to invest in a foreclosed property is because it gives you the opportunity to buy a home below market value. Foreclosed properties are typically cheaper because they often need repairs. Rather than make a profit, lenders sell the homes as-is to recoup the outstanding loan balance.

Build Equity Faster

Another reason buying a foreclosure can be a good investment is that it allows you to build equity much faster. These homes are usually in need of repair before they’re move-in ready. If you do the necessary repairs and make upgrades, you can quickly build equity and possibly sell for much more than you paid.

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