There are many benefits to buying a foreclosed home. The most obvious one is that you’ll likely be saving money, but there are a few other benefits that might not be so obvious. Let’s look at three benefits of buying a foreclosed home, and a few “gotchas” to avoid when purchasing a foreclosed property. We’ll also look at why buying HUD properties is a great option for buyers who are new to the foreclosed home marketplace.
The different types of foreclosures.
Buying a foreclosed property could take a few different forms. The foreclosure could either be from a short sale or an REO property. If a foreclosure is a short sale, then the sale technically happens before the actual foreclosure. This is where the bank’s willing to accept less than what’s owed on the property. A foreclosure could also be an auction that’s conducted at the courthouse. And a foreclosure could also be a bank-owned property. Buying at the courthouse steps is almost an art-form that’s not recommended for beginners. Banks will own most of the foreclosures that you deal with, but we’ll also look at some government owned homes later in this post.
The benefits of buying a foreclosed home.
1. One benefit of buying foreclosures is that it gives first-time buyers an affordable road to homeownership. But be careful about thinking you’re going to get a great discount just by going the foreclosure route. While it’s mostly true that these homes are affordable, buyers still can’t be unrealistic with the price that these homes will sell for. Random lowball offers are not going to be chosen by the bank or originating lender. Foreclosure sales will still require research to see what the going prices are in the marketplace. It becomes imperative that you research the market rates for houses in a few desirable neighborhoods.While a foreclosure might not be the bargain that infomercials make it out to be, it’s still a prudent path to home ownership. If a particular neighborhood is just out of reach, buying a foreclosed home could be the difference between affording and not affording a particular neighborhood. The savings could also help you fund necessary fixes and upgrades that foreclosed properties often require.
2. The second benefit of buying a foreclosed property is that you get bonus equity. Remember that you’re likely purchasing the home at a discount. The market value is whatever difference there is between your purchase price (including your repair costs) and the market value. That means that foreclosed homes can be superb deals for first-time home buyers.
3. Another benefit of buying foreclosed properties is that you’re taking the emotion away from the seller’s side of the equation. In a traditional housing transaction, the seller might still be emotionally attached to the home. The buyer is ready to make the deal, but some last-minute nostalgia might make a seller more reluctant to part with their home.
This doesn’t happen with a foreclosed property. You simply make your offer to a bank, who only cares about their bottom line. This is more like a cash for merchandise transaction with no emotions attached.
What is a HUD foreclosure?
A HUD foreclosure results when a homeowner finances using an FHA loan and then defaults on it. Because an FHA loan is financed with help or backing from the government, there are certain protections that the government provides lenders for taking on these loans. The bank who originates a defaulted FHA loan will send the house to be auctioned on the courthouse steps. If there’s not an acceptable bidder on that foreclosure auction, the home reverts to HUD ownership. These properties are referred to as HUD homes.
One benefit of buying HUD foreclosures is that HUD homes, as long as they’re not owner occupied, are free of deed restrictions and can be re sold by an investor. An owner-occupied HUD-foreclosed property will carry with it the expectation that the new owner will actually live there for at least 12 months. If financing is tight, there are special FHA programs that can help you afford a home purchase. For example, you may be able to qualify for FHA financing or special FHA deals like the $100 Down Payment Incentive program.
Do your due diligence before bidding on foreclosed properties.
One drawback of foreclosure properties is that they sometimes take a little longer to get the transaction closed. But this is an inconvenience that can easily be planned around. If you’re buying a foreclosed property, work with a real estate professional who can keep you informed on the timeline.
Another issue when buying from banks is that they are legally prevented from making any guarantees on the property. Also bear in mind that these properties have been sitting for a while, which means things might be deteriorating inside. Make sure that you have a thorough inspection done on the house before bidding on it. Just be aware that these inspections may need be done without the utilities on. Your inspection should include estimates for how much the repairs will cost and any possible issues that may arise with utilities. You don’t want to purchase a house only to find out in the winter that the floors are missing insulation.
Foreclosures remain a popular way to buy houses at a discount. As long as you do your research and prep work, you should be able to find a decently priced home at a bargain price.