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6 Reasons Why Foreclosures Are Bargains
Foreclosed or bank-owned homes are very attractive to buyers seeking bargains. They understand that lenders and government organizations don’t really want to own homes, but would rather move their “non-performing assets” off the books as quickly as possible, minimizing carrying costs. That can mean a great value for the right buyer.
|Foreclosed vs Other “Bargains”:|
Still, there are other bargain opportunities out there — homes for sale in the pre-foreclosure stage (including short sales) and homes being sold at foreclosure auctions — sometimes at discounts significantly better than at either other stage of foreclosure. So, why would a buyer prefer a foreclosed/bank-owned home?
- Condition. Lenders and government organizations selling foreclosed properties sometimes make repairs that return these properties to livable condition before putting them on the market — or they discount the prices accordingly to sell more quickly.
Homes sold pre-foreclosure or at auction can be in much worse shape, either due to neglect by their cash-strapped former owners or damage caused by disgruntled residents or vandals.
- Inspections. With foreclosed homes, you have the opportunity to order professional inspections — for structural integrity, systems, pests, mold, radon, etc. Although the home may be sold “as is,” indicating the seller is not willing to rectify any problems, at least the buyer can find out in advance what problems the property may have. If buyers have inspections conducted before making a purchase offer, they don’t have to go any further if the report shows problems they’re not willing to deal with. Or, they can make a lower offer to factor in the costs of making needed repairs. If the buyer’s intent is to conduct inspections after a sales contract is signed, buyers can include an inspection contingency in the contract that would allow them to terminate the sale if the inspection shows problems with the home.
Although professional inspections are also possible with pre-foreclosure and short sales, buyers of homes being sold at foreclosure auctions frequently do not have the opportunity to order professional inspections – and may not even be given time to conduct a personal inspection of the home’s interior. These buyers take the risk that the home sold at auction – usually “as is” with no warranty or disclosure requirements — comes with significant and costly physical problems that would have to be corrected at the buyer’s expense after the purchase.
- Title issues. Sellers of most foreclosed homes will deliver a General Warranty Deed to the buyer, which guarantees that the seller owns the property and has the right to sell it. After repossessing the property, institutional owners – lenders or government agencies – will usually pay off any known outstanding liens and taxes, relieving the next buyer of those obligations. (However, buyers should still ensure a title search is conducted and purchase an owner’s title insurance policy for extra protection.)
With pre-foreclosure and auction sales, by contrast, the buyer must be wary of possible unsettled claims and unpaid taxes or liens that would transfer with the property – not uncommon with these types of sales. Even if the buyer conducts a title search and can negotiate to have those issues resolved, unrecorded liens can show up between the search and settlement/closing on the property. Paying off those obligations can be an expensive surprise that cuts into the savings from buying the discounted property.
- Evictions. By the time an institutional owner puts a foreclosed property on the market, former owners or tenants have already been evicted from the premises.
Buying a pre-foreclosure or auction property, however, risks being in the position of having to enforce evictions – often an expensive, frustrating and time-consuming process (in some states it can take up to a year to accomplish).
- Ease of purchase. Although the process of buying a foreclosed property may present some additional wrinkles compared with buying a traditional home, the challenges pale in comparison with arranging the purchase of pre-foreclosure and auction sales.
With a short sale (a type of pre-foreclosure sale), you must not only negotiate with the seller, but also with the seller’s lender(s), who can reject your negotiated deal with the seller if it does not meet the lender’s requirements. In addition, the process can take many more weeks, sometimes months, to accomplish compared with a traditional home sale. In fact, many attempts at short sales never reach the settlement/closing table.
Foreclosure auction sales present their own challenges, with bidding procedures that vary by location. In some states, bidders must bring to the auction the full amount of their bid in cash or a cashier’s check. In other states, bidders must have a substantial cash deposit on auction day and be able to arrange financing for the remainder within a short period of time – sometimes as little as 24 hours — or forfeit the deposit. In addition, a thorough knowledge of the local auction process is essential to winning an auction bid, which is why novices are seldom able to win over seasoned professionals at foreclosure auctions.
- Redemption issues. Lenders may not put foreclosed homes on the market until the state’s mandatory “right of redemption” period has expired. Not all states mandate a redemption period, but in states where they do exist they allow a specified amount of time for the foreclosed homeowner to buy back the property after it sells at auction.
If you purchase a home at auction, you may be in the position of having to turn it back over to the foreclosed homeowner who is able to reclaim it by buying it back from you. The buy-back price could simply be your costs of purchasing the property, not necessarily reimbursement for any improvements you make afterward – depending on how the state law is written. In addition, if a redemption period still applies to the home after you purchase it, you would be prevented from selling the home until the redemption period expires – which could be up to a year in some states.