Foreclosed properties are often hailed as the hidden gems of the real estate world. In fact, in 2019, the foreclosure rate was 0.36%. Buying a foreclosed home at a bargain price can appear extremely tempting at first glance, but many buyers aren’t aware that there are many things you need to know when purchasing a foreclosed property.
Buying a foreclosed home is not for the fainthearted. If you’re in the market for a new house and are considering a foreclosed home, keep reading to learn more about the process.
What is a foreclosed home?
A foreclosed home is a home that has been repossessed from the homeowner and now belongs to a bank. This occurs when a homeowner fails to make their loan payments. The foreclosure process can take anywhere from a few months to years, depending on the location. Foreclosing on a home allows the bank to sell the property and try to recoup part of the money it lent to the borrower.
There are two different types of foreclosed homes: Bank-owned and Real Estate Owned (REO).
Bank-owned homes are in the beginning stages of foreclosure. This means that the homeowner has failed to make their loan payments, and the lender has begun the legal process to evict them from the home. In some instances, this stage of the process can be long and drawn-out. Once the lender takes legal possession, they put the house up for auction. The aim of the auction is to sell the home for the highest price possible to recover the money the bank has lost. The property becomes REO if someone doesn’t purchase it at auction.
Real Estate Owned (REO)
REO homes that fail to sell at auction are sold on the open market. When people discuss purchasing foreclosed home, they are typically talking about real estate owned properties.
What do buyers need to know about buying a foreclosed home?
Foreclosed homes can often to snapped up for lower than market value, making them an excellent opportunity for real estate investors. However, it’s important to note that lenders don’t simply give foreclosed homes away. Banks aren’t in the business of losing money, so they won’t typically sell a home way below market value.
Another important thing to remember is that REO properties often require repairs. Homes that are bank-owned often spend several months empty, so there is no one to oversee repairs if anything breaks down. Plus, a homeowner with financial difficulties who can’t afford to pay their mortgage is unlikely to regularly maintain their home.
Inspect the Property
It’s vitally important that when purchasing a foreclosed home, you hire a professional to inspect the property in its entirety. Everything from the structure of the property to its appliances should be examined. A home that has sat empty for several months can experience mold and damp issues. This can be particularly problematic for properties located in warmer states. Foreclosed properties often lack curb appeal, with unruly yards and abandoned landscaping. However, with some hardworking and TLC, it’s possible to turn an REO into a welcoming home.
In addition, unoccupied properties can also be targets for theft and vandalism. Many REO homes are targeted for their appliances or other valuables like copper piping and HVAC systems, so it’s also essential to find out precisely what is included in your sale. When purchasing a foreclosed home, it’s crucial to budget for repairs. Renovations and the replacement of appliances can significantly increase the cost of an REO home, so be sure to weigh up the pros and cons.
Put simply, if you’re looking for a move-in ready home at a low price, a foreclosure probably isn’t for you. Foreclosures can be a good bargain, as long as you’re prepared to be patient and not deterred by a little work.