(DailyChive.com) – The purchase of a foreclosed home appeals to many people. First-time home buyers, investors, and those looking for plenty of remodeling projects may even seek out properties in foreclosure. But buying a home at any stage of the foreclosure process presents financial challenges.
Some hesitate to consider purchasing a foreclosed property due to the stigma of taking over a home where the previous owners could not keep up with the payments or taxes. But foreclosures happen for a variety of reasons. Before deciding to purchase a foreclosed property, it makes sense to understand the financing process and the pros and cons of such a purchase.
How Homes Go into Foreclosure
Foreclosure involves a bank or lender taking repossession of a property. It usually involves an owner falling behind in mortgage payments, property taxes, or both. It usually involves the owner experiencing financial difficulties, but it may also stem from an abandoned property.
Foreclosure falls under the category of judicial or nonjudicial depending on the state where the property stands and the mortgage company’s policies. The legal procedures of foreclosing on a home typically give the owner plenty of time to make other living arrangements, usually making it a lengthy process. It may take over a year in some states to complete the process.
The three stages of foreclosure include:
- Pre-foreclosure
- Auction
- Post-foreclosure
Read on to learn more about the financing rules and options and the pros and cons of each foreclosure stage.
Advantages and Disadvantages of the Different Stages of Foreclosure
When looking at a foreclosure home, make sure you know the stage of foreclosure and what that means to you as a potential buyer.
Pre-foreclosure:
The owner missed the required number of payments for the bank or lender to initiate the foreclosure. The bank files the lawsuit, and the seller awaits a countdown to the auction stage.
- Advantages include the ability to negotiate with the current owner since they’re still in a position to benefit from the sale. They may want to negotiate and be more willing to take care of needed repairs. The seller must also provide a complete history of the home’s condition.
At the pre-foreclosure stage, you may use traditional financing or work out a lease-purchase agreement with the seller.
- Disadvantages include the price of the home may still waiver around market value since it’s in the beginning stages of foreclosure. Additionally, the house may need costly repairs due to the owner’s financial struggles.
This early stage of foreclosure also comes with uncertainties. The seller may back out entirely and halt the foreclosure process if their financial situation improves.
Auction:
At the auction stage, it’s no longer possible for the owner to recover the property or the right to sell it. The lender may put it up for auction for no more than the mortgage and related fees owed.
- Advantages deal mainly with price and lack of competition. Many times the lender will take a cash offer significantly below what is owed on the mortgage.. Another advantage involves simplified negotiations and less time waiting as the owner no longer has the option to reverse the foreclosure.
- The disadvantages at this stage of foreclosure include limited financing options; usually, they only accept cash offers. The sale defines ‘as is’, meaning disclosures aren’t required, and purchase contingent inspections are not allowed. Additionally, as the new owner, the responsibility of liens on the property falls on you.
Another difficult disadvantage involves the previous owner still residing at the property. They may have trouble with relocation options delaying your ability to reside in the home.
Post-foreclosure:
If the property does not sell at auction, it becomes the property of the bank, otherwise considered as real estate owned or REO.
- The advantage of an REO home includes flexibility with financing. It will qualify for VA loans and other special programs. The bank may pay the realtor’s commission and offer closing costs concessions. The purchase comes with a clear title allowing for inspections. In most cases, the house is vacant at this point.
- The primary disadvantage at this point is the property’s ‘as is’ sale status. The lender cannot provide a history of the home’s condition, and often, extensive damage and needed repairs exist due to neglect and possibly even vandalism.
Looking Beyond Cosmetic Problems
When purchasing a foreclosure home, the problems often go far beyond updating kitchen cupboards or ripping out old shag carpeting. If you decide to buy a home in any stage of foreclosure, some of the things to consider include the following:
- Hiring a home inspector to report on the structural and mechanical components of the property
- If you’re at the disclosure stage, where you may receive information on the home’s history, obtain a Seller’s Property Disclosure Statement.
- Check for plumbing, electrical wiring, and heating issues.
- Check for insect and pest infestations.
- Inspect the home for mold, asbestos, and other environmental hazards.
Purchasing a home in foreclosure may not work for everyone, but it may represent a wise purchase for an investor or those willing to work on projects. Another big advantage of buying a house that needs significant repairs and TLC is the opportunity to make it your own.
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