While the opportunities to make money on foreclosed properties may be enticing, it’s crucial to know the risks and challenges before jumping in. Take a look.
Someone’s loss, another’s gain. Foreclosures occur when owners can no longer make payments on their homes or can’t sell them to pay off their mortgages. The price of a foreclosed home is typically set somewhere just above the amount owed on the mortgage, plus attorney’s fees and miscellaneous costs. The deal may be as good as 15 percent below market value. That’s attractive, yet significant risks need to be weighed.
The bank exercises legal options in their loan agreement to take the house away from the owner. Now the mortgage company owns the property and it is known as a “non-performing asset,” a property not bringing them money like it was when the loan was being paid. The bank will then hire a real estate agent to sell the property and recover its costs.
Property condition. A foreclosed home is often in poor condition. Before losing the house, the previous owners may not have had the money for repairs and upkeep. Angry owners facing foreclosure sometimes vandalize the home or remove appliances. It also may have been vacant for a period of time adding to its decline. When you buy foreclosed, you buy “as is,” which means no negotiating for repairs. Unlike typical seller-buyer transactions, it is unlikely a property condition disclosure will be available. It’s wise to have a professional inspector check the house out to make sure the repairs aren’t more than you can handle. Plan on spending the equivalent of 10 percent of the purchase price in repairs.
Title research. Have a professional title search done to make sure no liens exist against the house.
What about a short sale? A short sale generally occurs when owners need to sell their property, but the market value is insufficient to cover the mortgage balance. The sellers are in a distressed position, often unable to make payments, and have agreed to deed title to the lender to avoid foreclosure. The lender then lists the property for sale, usually at a price lower than the loan payoff. Once sold, the mortgage lien is removed from the title, saving the owners the foreclosure blemish on their credit profile. It is often a less expensive option for the lender versus the cost of a full foreclosure. The new buyer reaps the benefit of buying a property priced under the market value.