Risks Associated with Buying a Foreclosure
Buying a foreclosure home either as a personal residence or for real estate investing purposes has several advantages. One of the largest benefits of purchasing a foreclosure is the potential savings and profit a buyer can enjoy when presented with the right opportunity. While the rewards can be great, it is important to note that there are risks associated with purchasing a foreclosure property.
Pre-Foreclosures
The timeframe between when a homeowner receives the Notice of Default for the lender and the day the property is put up for auction is known as the pre-foreclosure period. It is during this time that many buyers can find several bargains. However, the flip side is that purchasing a home during this time can be extremely difficult and is often left to the experienced investor to attempt.
When a home is in pre-foreclosure, an interested buyer must deal directly with the homeowner, who may be less than receptive to discussing or dealing with losing their home in a foreclosure. You can only imagine how they might feel to have someone knocking on their door wanting to buy their home. If you are lucky enough to strike an agreement with the homeowner, you will have very little actual time to close the deal – often only a month – before the home hits the auction block.
Foreclosure Auctions
Buying a property at a foreclosure auction is probably one of the most challenging and nerve wracking way to purchase a home, particularly if you are a novice at buying foreclosures. At an auction, you often are unable to inspect the home prior to offering your bid. This is a major drawback if you are trying to determine how much you should offer versus how much you’ll need to spend on possible repairs in order to be able to turn a profit. Additionally, no warranty of any kind applies. This means that you will receive no assurances that there are no other liens or loans on the property. Furthermore, unless you can tap into a significant cash reserve, you will find it difficult to raise the cash purchase price in a relatively short period of time. Most jurisdictions require that the price be paid in full usually within only days of the foreclosure sale. If you fail to do so, be prepared to lose your deposit.
And, let’s not forget the uncomfortable aspect of having to evict the current homeowners if they are still living in the home. It becomes your job to follow the appropriate legal process to have them evicted. The process can drag on for some time and present potential problems should you have a disgruntled homeowner who decides to take their frustration of losing their home and being evicted out on the property. You could find yourself dealing with acts of vandalism against the property.
Finally, depending on the state you live in, you may find that the homeowner has a period of redemption that lasts several months after the foreclosure property sale. They may choose to hire an attorney and file a lawsuit to overturn the sale. Again, tying the property up from some time, if not permanently.
Foreclosure Listings
Many times the original lender or bank will buy-back the property after a public auction is held. Thus, the lender now holds the title, free and clear to the property. These lender and bank foreclosures, also known as REOs, are typically sold through real-estate brokers who may end up handling several foreclosure listings at a time. This is often the best time to purchase a foreclosure primarily because the title is generally clear and the property unencumbered by liens. These properties tend to be “safer” because they generally are handled along the same lines as a regular sale.
The lender doesn’t want to hold on to the home, the title is clear and the ability to negotiate a deal is highly likely. However, do not look for the lender for any needed repairs or renovations as foreclosure homes are often sold “as is” so buyer beware.
If you are new to real estate investing and buying foreclosure properties, doing your homework can not be stressed enough. Not only does it ultimately lessen the level of risk associated with buying foreclosures, but it puts you in the driver’s seat as you will be better informed. In turn, you will find that you can remain more realistic and focused in your quest for finding and purchasing the right foreclosure home.