There is no lack of cliché’s, pithy sayings, or wise words—for the optimist and pessimist—to guide would-be home buyers, but when it comes to foreclosures, this is probably the aptest:
“Opportunity does not waste time with those who are unprepared.”
As with all major decisions, buying a foreclosure can be a great option provided you’ve done your homework and are approaching it with eyes open. In this article, we’ll address some of the pros and cons of buying a foreclosure to help you make the best choice for your situation.
Save money: Even in today’s hot market, foreclosures are about 5% below market rates for homes in similar locations. This alone can save you tens of thousands of dollars on the purchase price, but with mortgage interest rates rising, you’ll also save even more over the life of the loan or until you sell.
Jump up a rung: Buying a foreclosure can allow you to purchase a larger home or a home in a better neighborhood. You may need to put in more sweat equity—and sometimes cash—than you’d planned on, but the result will be a nicer home than you would have otherwise been able to afford.
Make money: If you buy a foreclosure at below market rates and fix it up to current market conditions, you’ll be able to sell it at the current rates and make a healthy profit.
Higher risk: Some banks may spend money to make a foreclosure look nice on the outside, but the “as is” stipulation means you have no disclosure about mold, sagging foundations, the conditions of sewer pipes, etc. Unexpected repair costs can easily wipe out the money you saved on the purchase.
Less-than-great locations: Most of the deals and steals in great locations are long gone which means you’ll more often than not be looking at homes in less desirable areas and neighborhoods.
You may owe more than just your mortgage: Past due tax obligations, construction loans, or home equity lines of credit on a foreclosed home may all fall to the new buyer. You’ll need to make sure a foreclosure is free and clear of any other unpaid debts.
Time and red tape: “30 days of escrow and in you move” is far from the norm with foreclosures. There’s a lot more paperwork and you might wait weeks just to hear back from a bank, let alone receive a yes or no. Plus, if it takes too long, you might have to get re-approved since some lenders place time limits on rate approvals.
In addition, your financing might be complicated as some lenders won’t provide loans for a foreclosed home if its condition is below a certain threshold.
So What’s the Verdict?
It really depends on you:
- Are you willing to learn all you can about foreclosures? Go to seminars, browse websites, lurk on forums? The more you learn about the process the better prepared you are to profit from it.
- Do you have a team you can rely on? A real estate professional and/or lending expert can help you with local laws and regulations as well as fill in any gaps your own research has failed to cover.
- Are you future-oriented? If you’re purchasing a foreclosure to live in for 5 or 10 or more years think about all of the things that you’ll need to do to bring your house back to its full glory.
- Are you in good financial shape? There will be surprises and unexpected repairs when buying a foreclosure. Are you able to absorb them? How much rain can your rainy-day fund weather?
- Can you hurry up and wait? There’s lots of competition so you’ll need to jump on any good leads, but then be ready to wait weeks or even months before a sale is finalized. Do you have somewhere to live while you’re waiting?
If you answered, “Yes” to all or most of the questions, buying a foreclosure might be a great way to save money and end up with a great home you’ll enjoy for years.
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