Many homebuyers who want to get a great deal on a new property swear by foreclosures. These distressed properties are homes on which the previous owners have not paid the mortgage. As a result of nonpayment, the houses are repossessed by the lenders, and these homes are eventually sold either by the banks or by government agencies.
Because these homes have often been vacant for some time and because the homes sometimes only need to be sold for a fraction of their value to cover mortgage costs, these distressed homes are often sold at less than full market value. However, does that mean that they are always a great deal?
The answer is “no.”
There are times when foreclosures are a dud. Buying a distressed property in an excellent location, and fixing it up yourself can save you a lot of money. However, when trying to determine whether you should buy a property in move-in condition or a foreclosure, you need to consider several things:
Although some foreclosures are sold are less than market value, not all distressed properties are a bargain. Some properties are sold at above market value because they have no equity left. Some lenders offer homeowners loans over 100% of the home’s value.
If a homeowner uses up all equity on loans and then defaults on the mortgage, banks have little recourse but to try to sell the property at more than full value to get back the money lost. Plus, with more people aware of the bargaining power of foreclosures, more people are shopping for these distressed properties, and therefore, sellers are less motivated to sell at great discounts.
Many foreclosures are sold on an “as is” basis, meaning that if you find any problem with the properties after your purchase, the repairs, renovations, and the hassle will be your responsibility. Most homes sold the traditional way through a real estate agent; on the other hand, come with some form of guarantee. If there is a severe problem with the home that you were not alerted to, you can often seek legal help to get assistance with the repair costs.
Repair costs are a significant problem associated with foreclosures. While some foreclosures need little more than a bit of TLC, some require extensive repairs and renovations. Repairs on roofs, electrical systems, and heating systems can easily cost tens of thousands of dollars.
You need to budget carefully for these expenses, and you need to make sure that the cost of the foreclosure and the cost of the renovations will still add up to a bargain. With a home in move-in condition, on the other hand, your repair costs can be very minimal. They may involve repainting a bedroom in a color that you prefer, for example.
While some foreclosures are in great locations, many are located in less than desirable areas. Buying a foreclosure in a less than desirable area makes no sense, no matter how good the deal seems.