Before investing in a foreclosure home it is important to consider the advantages and disadvantages of this type of real estate purchase. In most cases, the biggest advantage is foreclosed properties are sold below market value. One of the biggest disadvantages is many homes repossessed by banks are often in need of substantial repair.
There are two basic ways to purchase a foreclosure home. Once banks repossess houses they place them for sale through public auction. Buyers submit bids and must be financially prepared to provide full payment to the auction house within 24 hours after their bid is accepted.
When no bids are placed on foreclosed houses via auctions, the property is returned to the bank. At this point, properties are referred to as real estate owned or REO homes. These properties are listed through the bank’s loss mitigation department or local Realtors. Buyers submit bids directly to the bank or their representing agent.
When buying foreclosure real estate through banks, borrowers must obtain preapproved financing prior to submitting their purchase offer. The exception to this rule is if buyers plan to purchase the property with cash. Prequalified financing lets borrowers know how much they can afford and provides evidence to the bank that the buyer is financially capable of purchasing the foreclosed real estate.
Individuals who have never purchased a foreclosure home might want to work with a Realtor or real estate investor who specializes in distressed properties. Foreclosure specialists can help buyers quickly locate homes in their price range and area where they desire to reside; assist in purchase negotiations; and help buyers obtain reduced closing costs.
REO specialists can locate foreclosure houses quickly by searching the multiple listing service databases. MLS listings provide information regarding the price, square footage, number of rooms, lot size and location; making it easy to locate the type of property buyers are interested in purchasing.
Buyers who choose to buy bank owned homes on their own should take time to conduct research and obtain comparative sales reports of property sales in the area where they plan to buy. Investigate property values and anticipated property value growth in the area, as well as school districts, shopping, employment opportunities, and access to interstate systems.
Once the ideal location and type of property is determined, compile a list of potential foreclosure houses. When working with a Realtor, the agent will arrange viewing appointments on the buyer’s behalf. When working alone, buyers must contact the seller or seller’s agent to schedule an appointment.
Take along a pen and notepad to note potential problems when viewing properties. It is also a good idea to bring a camera or video recorder to document areas requiring repair or renovation. Inspect the house from top to bottom and take note of structural damage, plumbing problems, electrical issues, termites, rodents or pest problems.
Home repairs can be a double-edged sword. On the one hand they can be a great bargaining tool to negotiate a reduced purchase price. On the other, buyers must account for repair costs which oftentimes are larger than anticipated.
Investing in low-priced bank owned foreclosure homes may or may not be the best bet. If the home requires extensive renovation it can end up costing more than buying a foreclosure home with a higher price tag, but requires fewer repairs. Be certain the “bargain” is truly a good deal by obtaining a professional home inspection and engaging in due diligence. Otherwise, you could end up with a house that is nothing more than a money pit.