When a buyer decides they are ready to purchase a home one of the most frequently asked questions from home buyers is, “should I buy a foreclosure?” The answer to this common question is that it depends and there is no absolute answer.
For some home buyers purchasing a foreclosure maybe an excellent option while for others it maybe the worse idea ever. As with most things, there are PROs and CONs to purchasing a foreclosure in real estate.
If you’re deciding whether you should buy a foreclosure or not, read on to find out what a foreclosure is and what the PROs and CONs of buying a foreclosure are.
What Are The Different Types Of Foreclosures?
A common misconception that exists with foreclosures is that all foreclosures are the same. There are actually several different types of foreclosures that exist. Below are some of the most common types of foreclosures that exist in real estate.
Pre-Foreclosure/Lis-Pendens Filed By Lender
A pre-foreclosure is a property that is still owned by the homeowner but the home’s loan is in default. The defaulted loan has been filed with public records once a Lis-Pendens is filed by the lender. Once the Lis-Pendens, which is a formal notice of pending legal action, is filed by the lender, it can take anywhere from 90 days to 12 months for the property to actually be foreclosed on.
During this time period some homeowners will be extremely motivated to sell their property while others will not and let their home go into foreclosure. It’s important to understand that while a property is in pre-foreclosure, any offers that are accepted by the seller must also be reviewed and accepted by the lender.
A pre-foreclosure is also referred to as a short sale, which can present several hurdles for buyers who decide to purchase a short sale or pre-foreclosure.
Foreclosures Sold At Auctions
Foreclosures can also be purchased via auction. Foreclosures for auctions can take place at the subject property, at the county courthouse, or online which has become extremely popular over the past 5 years.
Foreclosed properties that are sold via auction will begin with an opening bid amount. This opening bid amount is typically what the outstanding loan balance is, any accrued interest, and all additional fees such as attorney fees. If the opening bid is not met, which is fairly common, the home is then purchased by an attorney on behalf of the lender.
Bank-Owner Foreclosure/Real Estate Owned By Lender
If a property is unable to be sold at an auction it is deemed a “real estate owned” property, frequently referred to as an REO. An REO is a property that is owned by the lender and is the most common type of foreclosure in real estate.
Once a property becomes an REO, the ultimate goal of the lender is to move the property as quickly as they possibly can. In some cases, the lender will complete minor repairs, clean-up, and general maintenance to the property if it will help move the property quicker.
What Are The Benefits (PROs) Of Buying A Foreclosure?
Buying a foreclosure can be a great opportunity. There are many PROs to buying a foreclosure in real estate, which can be found below.
Lots Of Opportunities Available
The reality is that when a buyer purchases a home, it will not always work out as planned. There are unexpected events in peoples lives that can lead to a homeowner not paying their bills. The result of a homeowner not paying their mortgage is eventually a foreclosure.
The number of foreclosure opportunities are high, depending on your location. According to Realtytrac, 1 in every 1,148 homes located in Monroe County, NY was a foreclosure as of July 2015. This percentage may not seem significant but when you take into consideration the 300,000+ housing units in Monroe County, it is more than 3,000 foreclosure opportunities.
How can you find foreclosure opportunities in your local real estate market?
The best way for you to find foreclosures in your local real estate market is to hire a real estate agent who has experience in selling foreclosures. A great way to know whether a real estate agent has experience in selling foreclosures or not is to know what questions to ask while interviewing prospective Realtors. Some simple questions to consider asking prospective real estate agents include;
- How many foreclosures have you sold in the past 2 years?
- What are your thoughts about foreclosures?
- How successful have past clients been with purchasing foreclosures?
Great Opportunity For A High Return On Investment
While it’s not a guarantee that every foreclosure that is purchased is a great investment, the majority are a great investment. An obvious benefit to purchasing a foreclosure is the opportunity to yield a high return on investment. This applies in most cases whether a buyer is purchasing the foreclosure as an investment opportunity or to purchase as their primary residence.
When an investor purchases a foreclosure as an investment, the return on investment can be significant, sometimes 20-30%! Most investors who purchase foreclosures plan on fixing them up in a short amount of time and selling them at a significantly higher price.
It’s important to remember if you’re purchasing a home with the intentions to “flip” the property, you make sure you don’t plan on skimping on the remodeling. Many potential buyers who are in the market to purchase a home know what they should be on the look out for when considering the purchase of a “Flipped” home since some investors do poor work on their flips.
Opportunity To Obtain Properties In Desired Neighborhoods For Discounted Price
Have you ever driven through a neighborhood in your local area and thought to yourself how awesome it would be to live in the neighborhood. Then you find out how much the average home values are in the area, which is way more than you’re willing to pay or than you can afford to. It’s very frustrating, right?
Well, another great benefit to purchasing a foreclosure is that it allows buyers to purchase a property in a neighborhood for much less than the neighborhoods average values. Sometimes this is the only way a buyer is able to move into a specific neighborhood.
Have you ever heard of a real estate closing that took forever? Of course you have and there are tons of reasons why real estate closings are delayed which can be extremely frustrating to home buyers and sellers! If you decide that purchasing a foreclosure is the right fit for you, another PRO is that the closings can occur relatively quickly.
The time frame for a closing, of course will vary depending on several different circumstances. The most important factor in deciding how quick a closing can occur is the type of financing used to purchase the foreclosure. Since most foreclosures are purchased with cash this can lead to a closing happening within 30 days of a home entering into escrow. Other circumstances that can effect the length of a closing when purchasing a foreclosure include;
- Inspection contingencies
- Additional paperwork
- Title issues
What Are The Drawbacks (CONs) Of Buying A Foreclosure?
While for some buyers a foreclosure maybe a great fit, for others the drawbacks that can occur when purchasing a foreclosure can make it a terrible fit. Below are the most common CONs to buying a foreclosure in real estate.
Foreclosures Are Typically Sold In “As-Is” Condition
Most foreclosures are sold in “As-Is” condition, which is arguably the biggest drawback to buying a foreclosure. There are many reasons why buyers should have a home inspection when buying a home.
Some foreclosures will allow a buyer to have a home inspection and others will not allow a buyer to complete any inspections. Even if a foreclosure allows for a buyer to complete various inspections at their own cost, if a significant deficiency is found during the inspection, ultimately the buyer has wasted their money on an inspection. If a buyer requests for repairs to be made after their inspection on a foreclosure that is being sold “As-Is,” they are wasting their time since no repairs or further negotiations will be allowed.
Buyers who are purchasing foreclosures with cash don’t have to worry about financing rules and regulations. If you’re thinking of purchasing a foreclosure and you’re going to be obtaining a mortgage, you need to understand some of the potential difficulties that can occur.
There are many difficulties that can occur when attempting to obtain financing to purchase a foreclosure. One difficulty that can occur with financing on foreclosures are issues with the bank appraisal. Not only is a bank appraiser ensuring a home is worth what a buyer and seller agree to, but they are also ensuring a home doesn’t have any significant safety issues.
Since many foreclosures are in poor condition, there are often repairs that are cited in an appraisal which ultimately end up being a buyers problem if the foreclosure is being sold “As-Is.”
If you’re interested in buying a foreclosure and plan on obtaining a mortgage, a possible mortgage product is an FHA 203K loan. An FHA 203K loan allows the cost of rehabilitation and repairs to be added into the financing.
Foreclosures tend to draw lots of interest as soon as they are listed for sale. The interest comes from not only investors but also from prospective buyers who are looking to obtain the foreclosed home as their own residence. This is normally because the price tag on a foreclosure is significantly less than the average home values in the area.
The interest that is generated often leads to lots of competition for the property, which is a drawback of purchasing a foreclosure. It’s important that when purchasing a foreclosure in a competitive situation, similar to purchasing a home in a competitive sellers market, that you have a maximum price in mind that you’re willing to pay. Sticking to this maximum price can help eliminate the chance that you pay more for the property than you feel it is worth!
Additional Costs Maybe Incurred
There are costs that are associated with buying a home as well as costs associated with selling a home. The costs that a buyer traditionally is responsible for maybe different when purchasing a foreclosure.
When purchasing a foreclosure, the buyer is often responsible for additional costs, which is a drawback to purchasing foreclosures. A real estate transaction that involves a seller and a buyer will traditionally have the seller be responsible for paying the cost to perform an instrument survey of the property. A buyer that is purchasing a foreclosure maybe responsible for not only the instrument survey, but also the following;
- Outstanding Mortgage Costs
- Previous Missed Tax Payments
- Past Liens
- Title Document Preparation
As you can see above, buying a foreclosure comes with many PROs as well as possible CONs. It’s important to weigh all of the PROs and CONs before making the decision whether purchasing a foreclosure is a good idea or not.
I believe that for cash investors, buying foreclosures is a great opportunity to make a strong return on investment. For a first time home buyer, I believe that buying a foreclosure is not a great idea, but ultimately whether to purchase a foreclosure or not is the decision of each individual.
Other Top Resources For Buying Foreclosures In Real Estate
- The Foreclosure Process: Understanding How Foreclosures Work via BiggerPockets
- How To Buy Foreclosures: 10 Do’s & Don’t via HouseHunt
- 6 Tips On How To Buy A Foreclosure via Realty Today
Are you thinking of buying foreclosures in Rochester, NY? Are you unsure whether a foreclosure is the right fit for you? If so, make sure you weigh the above PROs and CONs to buying a foreclosure before you make the decision. If you don’t have a Rochester, NY Realtor yet, contact me as I’d be happy to sit down and explain the Rochester, NY foreclosure buying process and help you determine whether a foreclosure is right for you or not!
About the authors: The above article “Is Buying A Foreclosure A Good Idea In Real Estate?” was provided by the Keith Hiscock Sold Team (Keith & Kyle Hiscock). With over 30 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.
We service the following Greater Rochester NY areas: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton, Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush, Honeoye Falls, Chili, and Victor NY.
Visit our website at www.HiscockHomes.com.
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