4 Things to Know when Buying a Foreclosed Home
Drawbacks to Buying a Foreclosed Home
Most buyers find buying foreclosed homes to be a strange and mysterious endeavor. In realty it can be a rewarding experience or a frustrating one. Before you commit yourself into purchasing a foreclose make sure you understand what it is and how you go about buying one.
WHAT’S A FORECLOSED PROPERTY?
In a nutshell, a home is foreclosed on by the lender when the owner neglects to make mortgage payment for a few months. In order to cut their losses, the lending institution takes legal action to regain control of the property from it’s owner in order to minimize it’s losses.
Once the property is foreclosed the bank will attempt to auction it at a Trustee’s Sale or assign an asset manager and broker to list it on the local real estate market.
When you come across a foreclosure and decide you can’t live without it, here are some steps you can take to prepare for your purchase.
FIND A LENDER AND REALTOR
Depending on your financial situation, you may be in the position to buy a foreclosed home with all cash. If that is not the case for you, don’t worry. Private money lenders are there to create bridge loans or procurement loans so you can compete with other buyers who have all cash. You can of course use traditional financing if time allows but beware that lenders will scrutinize the condition of the property before approving your application.
Having an experienced Realtor plays a huge role in your success. The right agent can provide you with valuable resources to make the buying process go smooth, such as negotiating with the asset manager, finding a loan officer and locating a foreclosed property.
Unless you intend to buy the home with cash, you’re going to need an approval letter from a lender that shows you are able to buy the home. We advise you not to use the lender who owns the property for the purchase. Work with a lender you can trust and represents your best interests. The same is true when working with a Realtor.
KNOW THE COMPS BEFORE THE OFFER
Just like normal real estate purchases, the price and terms of the offer are negotiable. To write a competitive offer (often called your highest and best offer) you and your agent need to have a clear understanding if the homes market value based on factors such as location and condition. You also need to realize that others will be competing against you (especially if the list price is lower than normal). Your offer should be slightly higher if this is the case. Remember to consider the cost of any defects or repairs into your offer since the home will be sold in as-is condition.
Get to know locals tradespeople who can help you determine what repairs are needed and how to consider those costs into your initial offer. Remember, you may only have one shot to get it right. It really just comes down to you doing your research on the home. Find out as much as possible up front. The bank won’t have all the answers and disclosures will be very limited.
Here are some drawbacks you should seriously consider when planning to purchase a foreclosed home:
Previous owner neglect and damage
Often owners that are in foreclosure do not properly maintain the foreclosed home and may even intentionally damage or ‘strip’ the house before vacating.
Be cautious of mold issues, especially in humid climates. Often, previous owners or banks will not keep electrical power on and therefore, the air conditioning will not be running; this may lead to mold issues.
As Is contracts
Banks will usually sell a foreclosed home with an ‘As Is’ contract which will usually provide for no recourse for the buyer even when title defects arise. This could include the possibility of an inappropriate foreclosure (example: ‘robo-signing’), which may lead to a title issue.
In search of a good deal, don’t settle for a home you’ll later regret. Often, the difference in price translates to only a small amount in your monthly mortgage payment, say $75/month.
ADDITIONAL FORECLOSURE RESOURCES
- How to Buy a Foreclosed Home via Nina Semczuk
- Funding Options for Foreclosure and Bank-Owned Properties via Auction.com
- Arizona Home Foreclosure Laws via Amy Loftsgordon
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About the Author: The above article, 4 Things to Know when Buying a Foreclosed Home was written by Troy J. Elston, a licensed Realtor at West USA Realty, the premiere real estate brokerage based in Peoria Arizona. With over 16 years of experience in the real estate industry, Troy produces stunning results for home buyers and sellers. If you're thinking of BUYING or SELLING a home in the Phoenix Area, Troy would love to share his knowledge and expertise with you.
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