Buy a Foreclosure – Many buyers, naturally, are wary of purchasing a foreclosed home, sometimes known as a distressed sale.
There are several horror stories of individuals buying foreclosures and then regretting it, but buying a foreclosure isn’t always the nightmare that some paint it to be.
However, there are several things you should know about foreclosures before you consider buying one as a permanent house or an investment property. Before you consider investing big sums of money in a distressed property, learn what to expect and prepare yourself.
Understand what a foreclosure is
A foreclosed home is a specific term referring to a step in the distressed selling process. The various sorts of distressed homes are simply at different places along the distressed sales continuum.
In a pre-foreclosure, the homeowner is in arrears on the mortgage and the property is on the edge of foreclosure, but the lender has not yet foreclosed. Some aspects of pre-foreclosures are similar to distressed sales in the rest of the process, such as the typical inability of the homeowner to negotiate on things like repairs, or the fact that the owner may have been under financial stress for some time and the home may have some significant issues.
Tips for buying a distressed home
You don’t have to be an investor to consider buying a foreclosed home. There are some amazing discounts available for the appropriate buyer, but you must understand what you’re getting into before digging in.
Cash is king
Many investors buy their properties with cash, which makes it difficult to compete as a buyer who needs mortgage financing to be able to afford a home. You can receive a mortgage loan to buy a distressed home — more on that later — but you’ll still need to have plenty of cash on hand if you want to buy a distressed house.
Preapproval is essential for any buyer during the home-buying process, but it is especially necessary for purchasers looking at distressed houses. In many circumstances, you won’t be able to add stipulations to the loan, and if you’ve ever bought or sold a property with another human, you already know that the home sale process can be tedious and drawn-out — now image negotiating with a bank instead of a human on the other side of the deal.
The more red tape you can cut out on the front end, the more successful your home-buying experience will be, so do yourself a favor and get preapproved before you start truly looking at distressed homes.
Research, research, research
If we assume you’re getting financing for your home, we’ll assume you’re buying a pre-foreclosure or a REO property (remember, auctions are cash only). This can be advantageous because you cannot conduct the same kind of due investigation on an auction property as you can on other phases of distressed property sales, and as you can imagine, due diligence is critical when purchasing a distressed home.
Hire a home inspector and request that the inspection include a repair estimate. Then, keep in mind that repair estimates frequently exceed their limits; use that knowledge to evaluate whether to make an offer and how much to give on the home. This is also not the time to avoid what are frequently considered frivolous aspects of house transactions, such as title insurance. A title search is normally included as part of a home sale, but it is especially important in this case because there may be liens on the property that you are unaware of and will need to clear up as the sale proceeds.
Watch the market
Buyers interested in distressed properties are often competing against experienced investors, so it will pay to keep an eye on the market and make sure you understand what’s going on. If practically all of the foreclosures in your region are selling at auction, you know there’s a big market for them, and you might try to bid higher on the pre-foreclosure you’re negotiating with a seller. If there are a number of REO properties that aren’t moving, you may definitely take your time choosing a house and submitting an offer to a bank. In any case, you must comprehend what is happening in the real estate market around you and adjust your plan accordingly.
Make an airtight offer
Remember that contingencies aren’t the norm, and banks aren’t recognized for their ability to get things done quickly. The closer you can bring your offer to “final” in the first round, the better for everyone. If you’re unsure about what should be included in the offer and contract, consult with your real estate agent. You should have done a lot of research on the house by now and should be fairly confident in your decision; if not, you can always request another more expert examination.
Closing, repairs, and move-in
Few distressed properties will be move-in ready for their buyers. Depending on the amount of work that needs to be done, some buyers may choose to work on the house while living elsewhere and move in only when it’s ready, while others may believe that living in the house while working on it is feasible. That will be determined by you, your lifestyle and household, and the amount of repair needed on your recently bought, formerly distressed home.
If you do your homework, you’ll discover that buying a foreclosure — or a distressed property — can be a choice for owner-occupiers as well as investors. However, make certain that you are not sacrificing due diligence. Learn everything you can about the home you want to buy, and you’ll be much less likely to be disappointed as a homeowner.
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