There is a general notion that foreclosed homes are easier to acquire because of the lowered prices. Though that is true to some extent, it does not cover the whole picture. There is much more to consider in buying foreclosed homes than just the price. That said, you should know some of the risks and advantages involved in buying foreclosed homes.

Foreclosure

Foreclosure is the legal procedure performed by lenders to repossess a collateral because of a loan in default. In simple terms, the lender gains possession of the home in case the homeowner can’t pay the mortgage and interest. If you can’t pay your mortgage, you lose your home. The home is seized by the mortgage lender or sold in a public auction.

What makes foreclosed homes more affordable? The homes are offered at fair market value during the auction. As the property is already considered a loss by loan and mortgage companies, auctioning off the home as quickly as possible is more to their advantage. In general, the home is less expensive once it’s foreclosed.

However, foreclosure does not happen overnight. There is a process that foreclosures have to go through, and the duration depends on the state laws and regulations on where the property is. Generally, the foreclosure process starts 30 to 90 days after a homeowner fails to make mortgage payments on the first month.

After the second month, warnings and phone calls from the lenders would come. If no attempt was made to pay or make arrangements on the payment after a certain period of time, a notice or demand letter would come.

If after 30 days, you still haven’t made your payment, then there will be a “Notice of Default” issued. This is where the foreclosure starts. If payment has not been made after 30 days or so, the home will be then auctioned off by the Sheriff or Public Trustee.

You can buy the property before the foreclosure, during the auction, or after the auction. Each offers advantages and also entails some risks.

Pros of buying a foreclosed home

First, here are the advantages of buying the home pre-foreclosure. Pre-foreclosure refers to the period when the “Notice of Default” was issued.

The advantage of buying at this stage is that homeowners are more willing to sell off their property. This is because they get money out of something they can’t afford, while not totally ruining their credit status. Another is that owners are willing to sell the property for a couple of thousands of dollars at this time. As a buyer, you also get the chance to inspect the home and make assessments on its state and value. This way, you will can see whether the house is worth buying or not. Since the house is not officially for sale, you have less competition and would have better chances of naming your price.

Next are the advantages in buying the property during the public auction. One is you would be given plenty of time to do market research on the home’s value as well as the property values in the area. Another is that the price of the property is set at fair market values. Aside from that, the property is clean of any other outstanding debts, aside from real estate taxes. The auction provides comprehensive information about the property, and you can use that information to decide whether you would like to purchase the property or not.

Last is buying the property from the lender or bank if no one bids for the home during the action. The key here is to act quickly. You should make your purchase offer before the property is offered up for sale locally. The advantage is you will more likely get the property for the price that you want from the lender.

Cons of buying a foreclosed home

The disadvantage of buying homes at the pre-foreclosure stage is that you will also incur the back debt and loan payments of the property. You would also be faced with possible renovation and repair expenses. When you include everything into account, it may cost you more to buy a foreclosed home.

When you buy during auctions, the disadvantage is that you can’t inspect the interiors of the home. You can’t assess how much damage the home may have. It’s normal for foreclosed homes to suffer from damages from its previous owners. Another thing to note is that if the owners of the home are still present, the eviction process can be tricky and a real headache at that. The bidding war also ensues at this stage. You may see yourself bidding for more than what the house is worth.
Lastly, you would need cash or cashier’s check to pay for the property. That means you need to have good finances to buy the house at the auction. Of course, you also have to pay for the renovation and repair fees, as well as outstanding taxes.

With the third option, the problem is that it can take some work. It may take weeks before you get a confirmation whether the house will be sold to you or not. Another emerging problem is when the home’s loan value is larger than house value. Lenders and bankers would want to regain those losses by increasing the selling price of the home.

Considering the pros and cons carefully

With the pros and cons presented here, you should give buying a foreclosed home a serious thought. It is best to have solid finances, previous home experience, and the advice of a foreclosure expert before you attempt buying foreclosed homes. But even if you already have those, expect a lot of work, research, and effort when planning to buy a foreclosed home. You have to consider all the possibilities and scenarios mentioned in this article. If at the end of the day, you figured the advantages outweigh the disadvantages, then you might be on your way to getting a property at sale value.