Buying a foreclosed home could net you a great deal. But is it risky?
It depends on the situation. Some foreclosed homes are ideal. They are in great condition and were just a circumstance of bad luck. Others aren’t so pretty. They are in complete disrepair, won’t pass an appraisal, and need a ton of work.
Keep reading to learn about the riskiness of buying a foreclosed home.
The Appraisal is at Risk
If you need financing to buy a foreclosed home, you need an appraisal. Here’s the risk. You may not know the home’s condition. You may never see inside of it, especially if it’s sold at auction. What if the appraiser walks in and the home is in complete disrepair? He may not be able to value the home for the amount you need. This could make your loan fall through.
Some foreclosures are worth enough, though. They typically sell for less than they are worth. This works to your benefit. Just how much less it sells for, though, will determine the value you need. Lenders require the home to be worth at least as much as the sales price.
You May Buy a Money Pit
Buying a foreclosed home at auction often means you don’t see the inside. You don’t get the luxury of sending an inspector in before bidding either. You buy it on the spot. What if you buy a money pit? What if the inside is completely torn up or needs numerous renovations?
You agreed to buy the home so now it’s your job to fix it and make it livable. If you need financing, you may only be able to use the FHA 203K or Fannie Mae HomeStyle loan, unless you have cash lying around to fix up a home. These renovation loans provide funds to buy and fix up the home.
If that’s not what you bargained for, buying a foreclosure could be risky.
You May be Buying Liens
Property liens transfer with the property, not the person. You may not know the liens the home has on it aside from the mortgage. You could find yourself on the hook for some serious coin without realizing it.
Before you bid on a foreclosure, do a quick title search. All records are public matter. Some counties offer online search databases. If not, head to the local courthouse and look up any liens on the property. Figure the amount into your bid when bidding on the home.
You May Need Financing Fast
If you aren’t a cash buyer, you may not be able to secure financing quick enough for a foreclosure sale. Buying a foreclosed home at auction is nearly impossible with bank financing. If the home doesn’t sell at the auction, though, it may go on the open market. You’ll have more time to secure financing if you win the bid this way.
You’ll still face the same issues as above, with the exception of not knowing the home’s condition. Once the home is listed by a realtor, you can typically walk through it like any other home on the market. This gives you the chance to make a solid decision based on the home’s appearance.
The Home May not Appreciate Fast
Multiple foreclosures in the area bring home values down. It may take a few years to see an increase in the home’s value. If fast appreciation or a quick flip was on your agenda, it may not happen. Assess the area before making a bid. Look at the average home value and compare it to the amount you consider bidding on the foreclosure. If the two values aren’t close, you may not see a return on your investment like you hoped.
The Owner May Come Back
Some states offer owners the option to ‘redeem themselves’ and buy the property back. They have a specified period to do this. Sometimes it overlaps with the auction date. If the owner comes up with the money, he has first rights to the home.
You’ll receive any money back that you put into the home, such as the earnest money or down payment, but you lose the home. This situation isn’t common, but it’s a risk of buying a foreclosed home.
Buying a foreclosed home can be a great deal, but it has its risks. Weigh the pros and cons of the situation before placing a bid. Be ready to act fast if the bank accepts your bid. Have your professionals lined up ready to get to work should you be the lucky winner of the bid on the home.Click to See the Latest Mortgage Rates»