Thinking about buying a foreclosure property?
Last week, we touched upon foreclosure properties when we talked about short sales in one of our posts titled "Is buying a home in a short sale right for you?" This week, we wanted to continue on the topic of distressed properties and talk more about foreclosures. For anyone in the market to purchase a home, it is often worth the time to consider foreclosure listings as a potential source for locating your dream home. Although the basic concept remains the same, buying a foreclosed property often entails some important differences from a traditional sale. Anyone who is considering buying foreclosures should have a firm understanding of what a foreclosed property is, the steps involved in purchasing a foreclosure, and the pros and cons of buying foreclosures.
Although each state has its own rules and procedures regarding foreclosures, the theory remains the same in all states. When a buyer finances the purchase of a home through obtaining a mortgage, the lender has a security interest in the property until the loan is paid in full. If the buyer defaults on the loan then the lender may initiate the foreclosure process. Typically, this requires the lender to provide notice to the borrower of its intention to foreclose on the loan. The borrower then has a specific amount of time within which to cure the default before the loan is legally foreclosed upon. If the borrower is unable to bring the loan current, then the lender proceeds with the foreclosure. In most cases, this means that the lender takes possession of the property and then sells the property (properties taken in possession by the lender/bank are referred to as REOs or bank owned properties). Sometimes, the seller attempts to sell the property before the foreclosure process is completed in order to avoid an official foreclosure (these properties are referred to as pre-foreclosures).
Buying a foreclosure over a traditional sale comes with advantages and disadvantages. Price is often, but not always, an advantage. The low price of a foreclosure can be deceptive given the condition of many foreclosure listings. Because these properties are sold “as is” and many have been sitting vacant for months, even years, they are frequently in need of substantial repairs. Moreover, some owners intentionally leave their homes in less than ideal condition when the loan is foreclosed on by the lender. Anyone who plans on buying foreclosures must take the condition of the property into account when deciding what the home is worth.
Because the lender, or the seller, is trying to get rid of the home as fast as possible, they are frequently willing to accept a rock bottom price; however, this is not always the case. In some markets, foreclosure listings are snatched up almost as quickly as they are put on the market, making it imperative that a buyer be ready as soon as the property hits the market. Foreclosure listings can be found through an experienced real estate agent or through sites such as ziprealty.com.
Finally, buying foreclosures can involve more parties than a traditional sale. If the home is in the process of foreclosure, but has yet to be foreclosed on, then both the seller and the lender will be involved in the negotiations. This can make the process more complicated and time consuming. On the other hand, because both lender and owner are highly motivated to sell the property, foreclosure listings can actually fly off the market in record time. If, for example, a high end property comes on the market where the lender is not over-invested in the loan and the seller is trying to avoid having a foreclosure on his or her credit report, all parties may be willing to negotiate a sale immediately. In this case, a buyer needs to be prepared to purchase the home, including any necessary financing, as quickly as possible before another buyer steps in and makes a better offer. Just as with any real estate negotiation, the market plays a huge role in the deal.