Whether you are a first-time prospective homebuyer or a seasoned real-estate investor, purchasing a foreclosed home can be a wise financial decision. With the current ‘sub prime meltdown’, today foreclosed properties are a dime a dozen. You have probably seen several in your own neighborhood. These homes are going on the market at prices that are substantially lower than their fair market value, which means that you can get a great bargain. You will want to learn as much as you can about foreclosures, and about real estate investment before you enter the foreclosure market.
Despite popular belief, foreclosed properties are not always a win-win situation. When you buy a home at auction, you are agreeing to purchase the home as is, with no guarantees or warranties of any type. That means that whether you plan to rent it, live in it or simply sit on it, you must be prepared for the possibility of paying for repairs or renovation. In some cases, you can examine the inside of a home prior to auction day, but this isn’t always true. In fact, it is possible for a home to go into foreclosure, with its’ former residents still living in the house as if nothing has happened, making it necessary for the new buyer to initiate eviction proceedings.
This is not to say that purchasing a foreclosed property is always problematic; merely that you should realize that there are some degrees of risks and be willing to accept that as a part of the buying process.
Despite what you may have heard on television, flipping property is not a get-rich-quick scheme. Be prepared for the possibility that you will need to hang onto the property for a while. If you are hoping to turn a profit by selling a home right away, you are likely to be disappointed, particularly in today’s difficult real estate market. One of the reasons that there are so many foreclosures available right now is because the economy is plunging. This means that the value of all homes is lower right now, great for buyers, but not so fantastic for sellers. If you invest in property, you should be prepared to keep it until such time as the market favors a profitable sale.
You will also want to consider the different ways of acquiring properties that are in foreclosure. Each method of acquisition offers specific risks and benefits. Foreclosed properties can be obtained by:
1. Buying Pre-Foreclosures: Buying a pre-foreclosure home can be a smart move for both buyer and seller. The seller gets out of an unmanageable mortgage payment and the danger of foreclosure, while the buyer purchases the home at a substantial discounted price.
2. Buying at the Foreclosure Auction: This is when you show up to the auction, “on the courthouse steps”, and purchase the property outright. Buying at auction is the riskiest way to purchase foreclosed property as there are no warranties made, and if you are not approved for the total loan or a mortgage deal falls through you may lose the deposit that you put down upon winning the auction. When buying at auction, you may or may not have the opportunity to examine the home inside and out in this case. If you do not, be sure that you inquire as to whether there is a home inspection report that you can read.
3. Buying from Lender After the Foreclosure Sale: If no one bids on property that is being offered at a bank auction then the lender with the first lien (mortgage-holder) regains physical ownership. This type of transaction is called an REO (real-estate owned) sale. The lender will generally sell the property at or below market value in order to get it off their hands. This is the least risky type of foreclosure purchase, although you may or may not have a seller’s disclosure or home inspection in this case. You can, however, usually negotiate for an inspection contingency clause to be written into the purchase contract.
We have all heard the old saying that ‘location is everything’ in real estate. This is particularly true in the case of buying foreclosure properties for investment purposes. Rather than buying random homes that seem like bargains, a smart investor will spend time researching the area to find out what the future holds. The biggest profits are to be made in up and coming areas, such as neighborhoods that are experiencing revitalization; this holds true for both residential homebuyers and investors alike.
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