4 things to know before buying a foreclosure

4 things to know before buying a foreclosure

Buying a foreclosed home may seem like a great deal at first glance. After all, how could an incredibly low sale price not be a great thing, right? But, there’s more to foreclosed properties than meets the eye. They’re an entirely different breed than a traditional sale and they require a deft hand in order to be handled successfully.

If you’re considering buying one of these properties, you won’t want to skip this post. We’ve laid out the top four things that every buyer should know before getting involved with a foreclosure. If you decide moving forward with this process is the right choice for you, you’ll be able to go in to the deal with eyes wide open.

1. You’re dealing with a bank, not a seller

The first thing to know about buying a foreclosure is it’s very different than a traditional sale. Normally, you’d be negotiating with the current owner of the home. However, foreclosures only happen once the former owner has stopped paying his or her mortgage and the bank has taken over the property. By the time a home goes to foreclosure, the seller is out of the picture.

Obviously, dealing with a bank will be a much more formal process than dealing with another person. Be prepared to deal with a corporation and all the red tape that entails, including long wait times — foreclosed properties can take up to six months to fully close — and limited flexibility to negotiate.

2. It’s all about the bottom line

In a normal sale, there’s some wiggle room on the sale price. The seller sets a price that they think is fair, and you have the opportunity to go back-and-forth with them until you can reach an agreement. With a foreclosure, the bank has already lost money on their investment. They have a firm bottom of what they’ll accept on price — and they won’t budge.

However, sale price isn’t the only financing component you need to consider. How you’ll pay for the property is also a place for concern. Often, these properties go to investors who are able to to pay cash outright. If you’re planning on getting a mortgage, you may want to consider offering more money to compensate for the extra legwork that comes along with getting a loan.

That said, know that being approved for a mortgage on a foreclosure isn’t always the easiest thing to do. Mortgage companies tend to see these properties as liabilities and many are hesitant to finance them. If you can buy without a mortgage, that’s the way to go. If not, be sure to research companies that explicitly allow for this type on financing.

4 things to know before buying a foreclosure

3. You could inherit problems

Reading and understanding the fine print is key with foreclosures. In some cases, these properties are sold with the expectation that the buyer will inherit any existing issues with the title to the home. This could include things like liens, judgements, and unpaid taxes, which can cost you money and end up damaging your credit. Worst of all, you may not know what they are until after you’ve purchased the home.

If you’re looking into buying these properties, we highly suggest reading over the purchase agreement carefully (or having an attorney do so for you) so that you understand what the scope of your responsibilities will be if your offer is accepted.

You may also want to pay to have a title search run to get an idea of any problems you’d have to take on.

In addition to title issues, keep in mind that just like any other home, there could be structural problems to contend with. As always, you’ll want to elect to do inspections to give you a sense of the scope of work that the home needs. That way, if it’s too much for you to handle, you’ll be able to walk away from the home sale relatively unscathed.

4. You cover all the fees

As stated above, by allowing the previous owner to go into foreclosure, the bank has already taken a loss on the property. They’re unwilling to spend any more money on it. That means most of the transaction costs, which would normally be split between the buyer and the seller, will fall on your shoulders.

First, there’s inspections to think about. Any inspections you choose to conduct will likely have to be “for your benefit only,” which means that they’re purely informational, as far as the bank is concerned. If any repairs are needed, you can decide to either walk away or take care of them on your own.

Then, there are closing costs to consider.

Typically, these costs, which include all of the fees necessary to bring the property to closing, amount to around 1%-2% of the total sale price of the home. Typically, these costs are split evenly between the buyer and seller, whether they’re paid upfront or rolled into a mortgage. In this case, however, they’ll be your responsibility.

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