The Cons of Buying a Foreclosure
Foreclosed homes represent an advantageous opportunity for investment professionals and amateurs alike. When banks repossess property, they sell the property either at auction or through the local real estate market in an effort to recoup financial losses. Because banks want to offload foreclosed property quickly, buyers can sometimes purchase homes for prices below fair market value. Purchasing a foreclosed home, however, carries pitfalls all educated buyers should watch out for.
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Damage
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Not all homeowners leave their homes peacefully when faced with foreclosure. A foreclosed home may sustain significant damage from angry borrowers during the foreclosure process.
Even if the former homeowners vacated the property without causing retaliatory damage, an empty foreclosed home makes a ideal target for vandals, thieves and squatters -- resulting in the home requiring extensive repairs before you can move in or sell the property yourself. Empty houses also incur damage from the elements such as dried out sealing, backed up sewer gases and bugs.
Limited Concessions
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Not all buyers have the extra cash to fund repairs to a damaged foreclosed home. During a traditional home purchase negotiation, you can request concessions from the seller. Concessions are any added terms that the seller agrees to and must meet before the sale takes place -- including home repairs. Banks do not want to spend time and money fixing any aspect of a foreclosed home because this cuts into the bank's bottom line. While you can request concessions on a foreclosure, banks are far less likely to agree to your request than private sellers.
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Financing
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If, like most home buyers, you plan to finance your home purchase through a lender, your offer carries less weight to banks than offers proposed by buyers paying in cash -- even if your offer is slightly higher.
Because banks want to get foreclosed properties off their accounting ledgers as quickly as possible, cash offers are preferable because they ensure a quick closing process and property transfer. Buyers that need financing must wait for their lender to process the mortgage paperwork -- resulting in a longer waiting period for both parties.
Tax Liens
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If a previous homeowner owed unpaid taxes to the Internal Revenue Service (IRS), an outstanding tax lien could exist on the home. Even though the individual who owed the tax debt no longer owns the property, real estate liens attach to the property itself rather than to the individual.
The IRS has 120 days to redeem its tax lien after a foreclosure. Thus, if a foreclosed home carries a tax lien and you purchase the property, the IRS can legally seize the property from you at any point during the 120 day redemption period. Should this occur, the IRS will reimburse you the original price you paid when purchasing the home, but will not reimburse you for any additional costs you incurred or home improvements you made on the property.
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