There are quite a few potential advantages to purchasing foreclosed property, namely buying property at lower than market value and being able to move in more quickly to name just two. The trick comes in figuring out the best time to make that real estate purchase. We’ll look at the advantages and drawbacks of buying properties at different stages in the process so that you can make an educated decision.The Pre-Foreclosure StageEarly on in the foreclosure process, you’ll be working together with the current owners of the property to come to an agreement that will allow you to take ownership of the property. There are a number of pluses to making your purchase at this point:Purchase agreements that are negotiable – Instead of having to deal with real estate agents and others who are concerned about their commissions, you will be negotiating directly with the property owners. This means you have much more flexibility regarding the agreement.
Reduced purchase price – Because of the bad situation in which the prior owners have found themselves, you may be able to buy the property for much less than it is worth. Prices that are significantly below property’s market value are normal at this point because the owner usually just wants to get out from under the debt on the property quickly and is less concerned with making a profit on the property.
Lower Down Payments- Often, lenders ask for a 10% down payment on non-foreclosure properties. By purchasing a property during pre-foreclosure, this can be reduced dramatically. Sometimes you can even buy with no money down, depending on how quickly the owner wants to get rid of the property and the debt.
Faster Closing Times – Because the property owner is probably eager to get rid of the balance due and to move on, you can often complete the entire deal much quicker than you would with conventional property purchases.Although the list of advantages is impressive, there are a few potential downsides you should keep in mind before buying at the pre-foreclosure stage.Homework, Part 1: What is owed? – When you buy the home, you are going to be taking on all of the debt connected with that property, so you need to make sure that you know what you are signing up for. A case in point would be that if the prior owner has taken out a second mortgage or if the house is being used as security for another debt that has not yet been paid, you may end up owing additional money.
Homework, Part 2: Finding a home – The biggest challenge can simply be finding a pre-foreclosure home that you want. Legally, the lender must submit a Notice of Election and Demand (NED) into the public record before foreclosing on a home. You can sometimes find these NED’s on lenders’ websites or by checking the public record section of your local newspaper. You can also go to your courthouse and search for the records by hand, but this is extremely time-consuming and usually not very fruitful.
Homework, Part 3: Coming to an Agreement – Sometimes dealing directly with home owners can be easier, but sometimes reaching an agreement may be difficult. Make sure the property owner is serious about selling the property and willing to negotiate. Otherwise, it is not going to be worth your time and money.The Foreclosure Auction StageWhen a property gets to this point, the bank has already foreclosed on the mortgage and owns the property, and the time for bargaining with the owner is over. Auctions are one of the most usual ways for potential buyers to locate properties, usually because of the following advantages:Auctions are Easy to Locate – Unlike pre-foreclosure properties, auctions involving foreclosed property are pretty simple to find. They are often advertised online, in newspapers, and sometimes even on television. You can also get in touch with some lenders to find out when and where auctions will be held.
There are No Guilt Feelings – Sometimes, buyers of pre-foreclosure properties may feel guilty about profiting from the owner’s hard times. This can be intensified because they sometimes get to know the old owners through the negotiations. The auction is completely impersonal, which ensures this will not be a problem.
Bargain Prices – It costs lenders money to own these properties, so they usually do not want to hold on to them. However, only in about 1/5 of auctions does the property actually change hands. Lenders can be desperate to make back their loses and get rid of the property, they can sometimes be open to very low bids.Just as with pre-foreclosed homes, though the potential for savings is great, there are also some potential dangers and problems with purchasing during the foreclosure auction stage.Competition with Other Buyers – Foreclosure auctions can draw larger crowds, and you may find yourself bidding against other people who want the same thing. This means you may either pay more for the property or not acquire it at all.
Limited Chance to Research – Usually, when you bid on a home at a foreclosure auction you are bidding without ever inspecting the property. This can be hazardous because the property may look great from the outside but there may be problems that are hard to spot, like termites, mold, an old heating or cooling system that needs replacing, etc. which can cost you lots of money.
Spinning Your Wheels – Nearly half of all scheduled foreclosure auctions end up being canceled or delayed because the owners are trying everything they can to keep their home. If you have a long drive or flight to the auction or taking time off from work to attend, these cancellations can cost you time and money. To prevent such problems, you should always call beforehand to make sure the auction is going to be held as scheduled.
Miscellaneous Issues – The auction winner can sometimes liable for additional costs, including the money the lender paid to advertise the auctioned property. Also, there is the possibility that the original owner has not vacated the property, the auction winner may need to go through the hassle of having them evicted. This can be a time-consuming, aggravating, and expensive process.The REO (Real Estate Owned) StageAs mentioned, only about 20 percent of foreclosed properties are sold at auction, so the lender is often left with the property. At this point, they will usually perform necessary repairs on the property, pay any taxes owed, and do anything they can to make the property more appealing, then the house will go on the market.Plentiful – With recent changes in the housing market, foreclosures are growing in number. This means you can often find REO properties fairly easily. For example, in one Midwestern county at only one listing agency, about 125 REO properties were for sale.
Easy to Locate – REO properties are advertised just like any other homes being sold through realtors. The advertising won’t always specify that the property was a foreclosure, but sometimes it does.
Money for Repairs – The lender wants to earn back as much money as possible, so they will often cover the costs of repairs necessary to make the home more desirable. If they will not, they will sometimes discount the price so the buyer can handle the costs of those repairs.
Lower Risk – Since the home is owned by the lender and all other liens have been extinguished, you do not have to worry about discovering that you have to pay more money in order to do anything with the property.Although this option does provide the lowest risk when you are buying foreclosure property, there are still some disadvantages.Similar to Buying Conventional Property – Many of the benefits of buying a foreclosed home, including lower down payments and more flexible contracts, are not applicable at this stage. You will be dealing with both a lender and a realtor so the process will be more like purchasing a traditional property.
Less Profit Margin – When lenders reach this point, they are less likely to let the property go for next to nothing, so the amazing deals are usually not available during this stage. At best, you might pay 15% lower than market value.It really is up to you to figure out what is most important to you in buying a foreclosed property. If you want a combination of a low price, average risk, and a flexible arrangement, and are willing to put in more work, you find the pre-foreclosure stage to your taste. If you are not averse to taking a higher risk, you might save more money by taking your chances at a foreclosure auction. If you just want to save a little bit of money but don’t want to risk a loss, you may be best served by waiting to buy an REO home.