Buying Foreclosures - Pros and Cons

Foreclosure Buying Advantages:

Price:  The primary reason for buying a foreclosure is the reduced price of the home. Foreclosures are typically 10-15% below current market value. In today’s market, buyers have the opportunity to buy homes at extremely low prices if they accept the risks listed above.

Less Delays than Short Sales: While there still can be frustrating delays in foreclosures, there are typically more with short sales.

Foreclosure Buying Disadvantages:

Multiple Offers:  Due to the competitive pricing of foreclosure properties there are often multiple offers placed on a home with which buyers will need to compete. This is particularly true for home priced under $150,000 in the Fresno County real estate market. The selling price of a foreclosure may consequently exceed the listing price.

No Contingent Properties:  Banks will not accept offers from buyers that need to sell their own home first. It is viewed as too high of a risk for costly delays in the escrow process.

Delays in Response:  Due to volume of foreclosures nationwide, there can be a frustrating delay in responses from the respective banks regarding the status of a buyer’s offer. Buyer’s can wait a number of weeks prior to learning whether their offer is accepted. However, this response is markedly shorter (in most cases) than for a short sale.
Lack of Disclosures: When buying a foreclosed home, the bank does not provide disclosures on the home. There could be, for example, water drainage issues, mold or roof damage that the buyer may not be informed of. Buyers can pay for their own inspections of the property prior to purchasing, if desired. But, there may be pre-existing conditions that may not be discovered in a routine inspection.

Purchased As Is Condition:  In almost all cases a bank will not agree to pay for pest certifications, roof inspections, or repairs to a home. These are all the responsibility of the buyer. In addition, a foreclosure has often been vacant for a minimum of 6 months and there can be significant costs involved in preparing the property for move-in condition.

How to Buy a Foreclosure:

Sell Your Current Home: If you need to sell your current home to buy a new one that needs to be done prior to making an offer on a short sale or foreclosure. Banks will not accept your offer if you need to sell a home first.

Investors Save for Down Payment: Typically for investment properties, lenders are now requiring a 20% down payment.  For those interested in the scheduled auctions of homes (on courthouse steps, for example), banks typically only accept all-cash purchases.

Get Pre-Qualified: Banks require a pre-qualification letter to accompany any offer submitted on a foreclosed property.  Sometimes a bank will require prequalification from a specific lender.

Contact a Real Estate Agent: Due to the demand of foreclosed homes, speed and accuracy are critical aspects of successfully buying a foreclosure. An experienced foreclosure agent that is an expert on the market and area is a key part of ensuring that a buyer has the opportunity to buy a home.

Make an Offer:  Typically a standard purchase contract and pre-qualification letter are used to present an offer on a foreclosure. There may be additional documentation required by the bank, however, that will be needed prior to being considered.

Lender Accepts or Rejects Offer:  Prior to this stage it is strongly advised for a buyer to not spend any out of pocket expenses on the home for items such as pest inspections. A lender has the right to reject an offer at any time and buyers should be cautious of committing any finances prior to written confirmation of acceptance. At this point, a typical escrow can proceed based upon the conditions set forth by the lender.

Foreclosures are an excellent buying opportunity if you are informed of the risks and benefits.

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