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(The Financial Literacy Blog) – For anyone looking to purchase a home, it’s likely they’ve been told to take their time, explore all options, and research thoroughly. In doing so, there’s a good chance they’ve stumbled upon listings for homes in foreclosure. Much like any property purchase, foreclosed homes are a big investment and it’s important for people to weigh the pros and cons before making any decisions.
What Is Foreclosure?
Foreclosure is a process that begins when someone fails to make their mortgage payments. After the borrower is more than 120 days past due on their payments, the lender can notify the borrower about the foreclosure proceedings, which can ultimately lead to the lender seizing the property. A lender can take ownership of and sell the mortgaged property to recoup the money they’re owed. If the borrower successfully pays off their deficiency balance before the home is seized, any plans of eviction and sale are canceled. If they don’t pay off their deficiency balance, they can be asked to vacate the property and the lender can list the home for sale.
How Do People Purchase a Foreclosed Home?
People can find foreclosures for sale in their local newspaper, as it’s a requirement for the lender to publish a Notice of Sale. Foreclosed homes are often listed on traditional real estate websites, such as Zillow, Redfin, and Trulia. Listings for foreclosed homes may also be listed on credit union and bank websites. However, before they are listed for sale on traditional real estate listing resources, foreclosed homes can be found at auctions. The auctions can be found through searches of city or county public records, local newspapers, or through foreclosure-specific websites, such as auction.com or foreclosure.com. When an auction is held, the minimum bid typically represents the amount owed to the lender plus fees. The home is then generally sold to the highest bidder.
What Are the Pros and Cons?
Pros:
- Lower pricing possible – One of the largest benefits of purchasing a foreclosed home is that they’re almost always priced lower than other homes in the area. This is because the lender simply wants to recoup the money they’re owed, which is the remaining amount of the mortgage that wasn’t paid. The price will vary depending on the location and condition of the home, as well as how much the previous owner still owed on the house. If the home is being sold at an auction, the price will be determined through bids. However, even when there is bidding from multiple interested parties, the final sale price is traditionally lower than market value.
- Potential investment opportunity – If someone is a first-time home buyer, they may just want to purchase the home at a low price for themselves. However, one of the selling points for many buyers of foreclosed homes is that they can be great investment opportunities. Since they are traditionally priced low, a buyer can purchase the home, make renovations to increase its market value, and then sell the home for a large profit.
Cons:
- Financing not always an option – Unlike most real estate transactions, where the buyer secures financing at a credit union or bank in the form of a mortgage, foreclosure sales don’t always accept financing. This is especially true if the home is being sold in an auction, where cash is usually required. If someone has the cash, it can be a great way to purchase a home at a significantly lower price. However, coming up with that much cash in-hand can prove to be difficult. Loans may be available, but the lender might be more hesitant to finance a purchase––especially if the home has been vacant for a while or has damage. For payment alternatives to cash, aspiring buyers can explore these options.
- Highly competitive market – The market for foreclosed homes is highly competitive. After all, foreclosures are homes being sold at an often substantially lower price. It’s easy to understand why people are drawn to them. If the home is being sold at an auction, people may find themselves in a bidding war with others who also want a low-cost home.
- Inspections not always available – A lot of foreclosed homes are sold as-is. That means people often need to forfeit their chance at having the home inspected. With the market being so competitive and lenders wanting to sell the home as quickly as possible, the option for inspections are often off the table. This means buyers might not be able to see undocumented damage or areas in need of repairs before purchasing. If inspections are available, aspiring buyers should have them done. If they aren’t, aspiring buyers should weigh the pros and cons of making the large purchase as-is.
What Is the Bottom Line?
Buying foreclosed homes can be a unique opportunity for homebuyers looking to pay lower prices. However, it’s important to keep in mind there may be damage and undocumented issues stemming from the previous owner, and cash-only options can deter buyers interested in securing a home with financing. There are pros and cons and it’s important for buyers to do their thorough research. If people can, they should consult with a real estate agent who can guide them through the foreclosure and homebuying process before making any decisions.
WMTW Channel 8 Total Money
This topic was discussed during the noon broadcast on May 11.