Ask The Experts: What are the Pitfalls of Buying a Foreclosure?
House flipping is back in style. Before the housing market collapse of 2009 you could make some fast money by buying a house and turning around and quickly selling it. Sometimes you had to make some improvements but often you didn't. That's because average real estate prices were rising.
When the foreclosure wave hit, many investors waded into the market to snap up these distressed properties at bargain prices. At first they converted them to rental property, but as the housing market has recovered and prices have risen, many investors are “flipping” again - and many are finding the best bargains among homes in foreclosure.
But buying a foreclosure – especially one at auction – is not exactly for the faint hearted. If you don't have a thorough grasp of the process, you could end up losing a lot of money.
Often, it's hard to even know when and where a foreclosure auction is to be held. The schedules are subject to change at the last minute. If the homeowner is somehow able to cure the loan or arrange a short sale, the auction can be put off indefinitely. Legal ads in the local newspaper may be the most reliable source of information.
At the same you may be competing with some very experienced and well-financed investors. Investors, including some hedge funds, have been among the most active participants in the foreclosure market lately.
Banks will be represented as well. Very often the lender will purchase the property at auction and put it back on the market.
A Different Process
The process of buying a home at a foreclosure auction is very different than buying it from an owner with both parties represented by Realtors. You will likely not have access to the property until just before the auction, so you won't be able to conduct a thorough inspection.
There may be damage to the property – both the kind that is visible and the kind that you don't see. You won't discover it until you get into your renovation. By then, you'll own it.
You have to know exactly want it is you are buying. The danger is that the property may have more than one lien against it. If the foreclosure auction is to settle the second mortgage, you better be clear on the disposition of the first lien.
Having access to someone who can conduct a title search on the property before the auction is a necessity. If the search turns up unexpected items, that may drastically reduce the amount you are willing to pay and may cause you to walk away and continue your search elsewhere.
That doesn't mean you should never buy a foreclosed property. After all, there are other ways to get a foreclosure without mixing it up at an auction. As mentioned earlier, banks often buy the properties and put them on the market, listed with a Realtor.
These are called REO, which stands for Real Estate Owned. When a bank sells one of its foreclosed homes it tries to move it quickly and isn't too concerned by how much it gets for it. On average, a buyer can purchase an REO property at a 30% or more discount.
While you can inspect the property with a Realtor, just like any other home in the Multiple Listing Service (MLS), keep in mind the property is being sold “as is.” That means the seller – the bank – isn't fixing anything or making any repairs.
This can be an issue when it comes to financing. If damage is extensive you may not qualify for a conventional loan but instead, may have to take out a renovation loan, at a higher interest rate.
Still, foreclosures offer would-be homeowners and investors an attractive opportunity, as long as you are careful. The experts below offer advice on staying out of trouble.
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