The Advantages & Disadvantages of Buying a Foreclosure
When a home goes into foreclosure, it is usually after many months of payments have been missed by the borrower. Banks usually start the foreclosure process after sending many notices to their delinquent customers. Buying a home in foreclosure can involve completing the purchase while the home is in the foreclosure process, or after the home has already gone to the bank. While price can certainly be a huge advantage when buying foreclosures, there are several disadvantages that buyers should also be aware of.
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Advantages
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One of the biggest advantages to buying a foreclosure is price. Often, sellers who are in the middle of a foreclosure are faced with the prospect of losing all their equity. They may be willing to sell for below the market value of their property in order to complete a sale, prior to the bank taking back the property. Also, once a bank has taken back a property in foreclosure, they are usually anxious to remove the property from their books and are willing to negotiate a favorable price for a quick sale. Some banks have departments devoted to handling the sale of properties they have taken back. These are called Real Estate Owned (REO) departments. Another advantage to buying foreclosures is that the sales can occur rather quickly due to the urgent nature of the circumstances.
Disadvantages
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A major disadvantage to buying a foreclosure is that it is a distressed sale. This can result in unseen damage to a property due to angry former owners or even tenants. In some cases, where an owner or tenant has refused to vacate the premises, you might not be able to inspect the property prior to purchasing it. Also, some foreclosures are purchased in an auction format, where buyers usually congregate at some prearranged meeting place such as a courthouse, and bid on the property. This can result in buyers over-bidding the value of the house and, in essence, paying more than the property is worth. Also, financing in this case must be arranged in advance, because sales at foreclosure auctions must be paid for within a short period of time.
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Strategies for Purchasing Foreclosures
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When preparing to purchase a foreclosure, it is best to know as much about the property as possible. You should try to have a third-party inspector, such as a licensed general contractor, examine the property before you decide to buy it. Also, if buying from a bank, see if you can get the bank to agree to a home warranty policy that will protect you against major unseen problems, such as electrical or plumbing issues. If you plan on buying a foreclosure at an auction, do a thorough market analysis of the area prior to the auction, showing what homes are selling for. This information will help prevent the tendency to over-bid the price.
Considerations
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Do your homework prior to completing a foreclosure purchase. Some real estate brokers specialize in dealing with foreclosure properties, and can provide helpful lists of available properties that are currently in foreclosure, or that have already gone back to the bank. When buying a property that has already been foreclosed on a by a bank, make sure you know whether the bank is selling the property as-is, or if they will provide certain minimum repairs or even a home warranty policy to protect you in case the home needs repairs.
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