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Should you buy a Foreclosed Home?

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When a homebuyer defaults on a mortgage, the lender has the right to take possession of the property. This is called foreclosure. The lender then tries to sell the home in order to recover as much of the value of the loan as they can.
One strategy for buying a home is to look for these foreclosure properties. This article discusses the rewards, risks, and challenges of buying foreclosures.

Rewards

In general, foreclosures sell for lower prices than comparable homes. This is true in part because the financial institution has no use for the home, making the institution a motivated seller. Often, foreclosures are sold at auctions, where lenders try to unload many properties as quickly as they can. Another reason that prices tend to be lower is to compensate buyers for some of the risks of buying a foreclosure (see below).
Another benefit of buying a foreclosure is negotiating leverage. You may be able to extract concessions from the seller, such as a below-market mortgage or funds to cover repairs.

Risks

The biggest risk with a foreclosure is poor physical condition of the property. Someone who is being thrown out of a house has no incentive to maintain it, and indeed they may go so far as to destroy it. Some lenders repair their foreclosures before they sell them, but many do not. In some cases, the lender does not allow bidders at a foreclosure auction to inspect the properties prior to bidding, which makes it difficult to assess their condition.
The next biggest risk associated with a foreclosure is risk of legal entanglement. As long as the owner still occupies the property and/or the lender has not taken clear title to the property, the legal dangers are very serious. You could end up trying to process an eviction or finding yourself liable for back taxes on the property that never were paid.

Challenges

Some additional challenges with buying foreclosures include:
  • If you aim for buying a foreclosure, you cannot be as selective about location and other characteristics of a home as you can otherwise.
  • Foreclosures typically require rehab work in order to realize their potential.
  • You need to have an experienced real estate attorney working for you in order to negotiate aggressively and to mitigate your risks.
  • Foreclosures are not advertised and listed as conveniently as regular houses for sale. To find out about foreclosures, you may need to use a specialized service.
 
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