Risks of Buying a Foreclosure

Roadblocks that can make buying a foreclosure a Money Pit

When a homeowner fails to pay their mortgage for an extended period of time, the home goes into foreclosure. This means the homeowner forfeits all rights to the home and it becomes the property of a bank or other lending institution. Once the homeowner has been evicted, the house is auctioned to the highest bidder.

Buying a foreclosure can be a great opportunity to get an affordable home, but it also carries risks. Buyers don’t always have the opportunity to inspect the property, and may find major issues with plumbing or electricity cost more to fix than the savings on purchase price.

Know the risks of buying a foreclosed home

While the low prices may be tempting, there are downsides to buying foreclosed homes. In the typical home-buying process, both sides can negotiate; but when buying a foreclosed home, the listed sale price is usually firm.

Expensive Repairs

Foreclosed homes are sold in exactly the condition you find them, and it’s the buyer’s responsibility to pay for repairs. In traditional home sales, repair costs present an opportunity for negotiation on price; often a home’s previous owners will pay for some repairs before selling, or reduce the purchase price to offset them. But a homeowner that couldn’t afford their mortgage likely couldn’t pay to maintain the home, either, increasing the risk that foreclosed homes will need costly repairs.

Additionally, the foreclosure process is long, so by the time the home hits the market, it’s likely been vacant for months without maintenance. Often, foreclosed homes have structural issues, including mold, broken pipes, animal or insect infestations, or other costly damage. Don’t take on a foreclosed home unless you’re confident in your abilities to rehabilitate it, and whenever possible, take the opportunity to inspect the home before buying.

Inheriting Debt

Unpaid debt is another downside to buying a foreclosed home. In some cases, the new buyer may be held responsible for unpaid taxes or construction loans. Make sure you understand exactly what you’re getting into before you buy. This is where an attorney who specializes in foreclosure law can help.

Difficulty Getting Loans

Lenders are not as eager to give out loans for foreclosed properties, and some lenders don’t offer mortgages at all for “distressed properties.” Most mortgages are determined based on the appraisal value of the home, so if the house is in bad shape and valued at a very low price, it could be hard to get a large enough loan to also cover repairs. Additionally, investors purchase foreclosed homes often, which creates competition for the average homebuyer who isn’t as experienced in the process, or who doesn’t have as much cash up front.

Buying a foreclosure can have big payoffs, but only if the circumstances are right to reduce your risk and maximize your opportunities for profit. Misjudging the value of a foreclosed home can turn an investment opportunity into a major financial setback. Working with an experienced real estate attorney familiar with foreclosures can help. Contact Anselmo Lindberg & Associates’ team of expert real estate attorneys and put them to work for you today.

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