Like any real estate venture, buying a foreclosed home has its fair share of pros and cons. Home buyers are eager to buy a foreclosed home or REO property for several reasons. You may want a new residence at a budget you can afford or are looking for an investment property with the intention to lease the place for additional income. Regardless of your motivation, however, it is important to mull over things and explore your options before fully deciding to buy a foreclosed property. It is up to you to decide if the risks are worth it or you would rather pursue a safer Canberra investment property route.
Further knowledge may be in order. You also need the help of experts who can guide you throughout the gruelling process of buying real estate.
How Foreclosed Homes Work
In the event a homeowner is unable to pay their mortgage for some time, the bank will be forced to list the home in the market. The general move would be to force a sale through a foreclosure auction in an attempt to recover monetary losses as soon as possible. Should this fail, the lender assumes ownership while the unpaid home subsequently turns into a real-estate-owned (REO) property.
Despite certain nuances, foreclosures and REO properties are often classified under the same category if not regarded as similar terms. As mentioned, buying a foreclosed property offers both advantages and disadvantages. The challenge for homebuyers is to weigh their decisions carefully and assess whether the risks are worth it.
The Upsides of Buying a Foreclosed Home
People have their respective reasons for purchasing a foreclosed property. Depending on the buyer's circumstances, these reasons may not cause much of a problem in the future. Some have truly managed to snag a good deal and transformed foreclosed properties into livable spaces.
1) Lower Price than Other Listed Properties
A bank-owned property offers you the benefit of a good bargain. Usually the purpose of the sale is to get rid of the property quickly and recoup losses. Buyers can negotiate to pay the foreclosed property at a lesser price. If you play your cards right, you can acquire a quality home at a significantly lower price than you normally would for a similar property.
2) Access to Upscale Neighbourhoods
Foreclosures are a good way to obtain property in otherwise expensive neighbourhoods. Some homebuyers are particular with amenities, environments and localities, but put off their plan due to budget constraints. With REO or foreclosed properties, you have better chances of landing a home in your desired district or suburban area without compromising the budget you set. This arrangement is favourable for newlyweds, expanding households, empty nesters or young professionals looking to live in reputable locations.
3) Opportunities for Financing Concessions
Closing costs are almost always a given for every successful property purchase. The advantage of buying a foreclosed home is you can arrange a financial concession with the lender. They may also offer to cover your closing costs, allowing you to buy the home at an affordable price.
Difficulties of Buying a Foreclosed Home
There are as much risks as advantages with the foreclosure route. Homebuyers must be prepared to encounter these setbacks and stand their ground if they wish to land a good bargain.
1) Multiple Financial Sources
A mortgage may not cut it. When you buy a foreclosed home through a property auction, you need to pay in cash. Buyers with multiple funding sources usually have an edge over those dependent on mortgage or similar financing. Lender may just require a down payment, but there might not be ample time to prepare the rest of the cash. Because of funding problems, some buyers resort to properties that fall below their standards.
2) No Repairs or Improvements
The rushed nature of a foreclosed property sale means you are likely getting a house vacated by its previous orders on short notice. There is not enough time to prepare the property for its next owner. Once you occupy the place, repairs and renovations will fall entirely on your shoulder. Word to the wise for serious buyers of foreclosed properties: set aside a portion of your savings to cover the costs of repairs and improvements.
3) Long-Winding Closing Process
Banks or lenders may be adamant to get rid of foreclosed homes and recover their losses but the closing process often takes time. They have to work on their backlogs first until it is your turn in the queue. If you are hoping to settle into a new home as soon as possible, then a foreclosed property may not be right for you.
Is it Practical to Buy a Foreclosed Home?
Homebuyers have to mull over these three areas before deciding on a foreclosed property: risk capacity, purpose for purchasing property, and funding sources.
Firstly, how much of a risk are you willing to take? Do you have a backup plan in case the purchase does not go your way or the risks are far greater than what you originally calculated?
Secondly, is this purchase for residential or investment purposes? It is easier to recover renovation costs incurred following a sale if you lease out the property.
Thirdly, whether you intend to pay in cash or through a mortgage, it pays to straighten out your finances prior to making a purchase.
For your financial safety, to avoid irreparable missteps, and in the event you decide to forego the auction process when buying a foreclosed home, it is best for you to work with a seasoned buyers advocate or agent who knows the ins and outs of the property market. This is a fail-safe way to get a good bargain without getting the short end of the stick.
