Foreclosures - Deal or Dud?
Months of looking. You’ve tried all the websites --Trulia, Zillow, HouseHunt, HomeFinder. You’ve gone to showing after showing, and finally there it is, the perfect home! Your kids love the backyard. Your spouse loves the master bath. You love the kitchen. Only it’s a foreclosure. What exactly do foreclosures mean for you?
Buying a foreclosure can mean that you get a steal of a deal. The pros and cons of this option vary, however, depending on how far into foreclosure the property is. There are four basic types of foreclosures: Missed Payments/Motivated Seller, Pre-Foreclosure/NOD or Lis Pendens filed by Lender/Short Sale, Foreclosure Auction, and Post-Foreclosure Bank-Owned Property REO.
Missed Payments/Motivated Seller
Missed Payments/Motivated Seller foreclosures are a great opportunity for you as a homebuyer. Because this phase is still quite early in the foreclosure process, it’s one of the easier and safer options for homebuyers. If the home you have chosen is in this phase of foreclosure, you’ll find minimal disadvantages compared to other closings.
- Owners want to sell fast so they’re more likely to accept a below market price offer
- Sellers tend to be more open to doing home repairs
- Sellers are more likely to provide concessions such as covering major closing costs
- You can still use regular mortgage financing
- You can get standard inspections done within the standard due diligence/contingency period
- A complete history of the property (problems, repairs, general condition, etc) has to be provided
- The current owners probably still live in the house and have to move still
- It’ll be difficult to negotiate the price below the seller’s outstanding mortgage balance
Pre-Foreclosure/NOD or Lis Pendens filed by Lender/Short Sale
This phase of foreclosure it still relatively early in the process, so it has many similarities with Missed Payments/Motivated Seller. There are a few more disadvantages to this phase, however, including a longer closing period.
- Owners are looking to sell quickly which means they’re more likely to accept below market price
- You can still get standard inspections done within the normal due diligence/contingency period
- If the purchase price doesn’t cover mortgage(s) and closing costs completely you have to get the lender’s approval of cost and terms of sale, which they may not approve
- Short sales take between 45-90 days to close
- Sellers still have to move out
Foreclosure Auctions can be a great opportunity if you’re looking for a new home on a budget, but they’re not without risk. The foreclosed property will probably be sold for below market price. However, despite the benefits of lowered costs, there are more disadvantages to this type of closing than those in earlier stages.
- The home will be sold for the outstanding mortgage balance owed to the foreclosing mortgage holder instead of full market price
- There’s less competition because these are cash sales
- Costs are paid in full on the day of purchase in cash
- No inspections are allowed
- You may end up owing other liens, back taxes, and mortgages
- The bank does not disclose property conditions
- The bank may buy the property itself if it doesn’t think the auction will recover a good price
- You have to pay for your own representation as no commissions or attorney’s fees will be covered
Post-Foreclosure Bank-Owned Property REO
The latest stage in the foreclosure process, this phase has some new advantages because selling the property becomes the bank’s top priority. There are still some disadvantages, however, that new homeowners should definitely consider before deciding to purchase the home.
- Bank is motivated to get property sold and will negotiate price, down payment, closing costs, escrow length, etc.
- Title will be clear, and you won’t have to take on any liens, mortgage or back taxes from the previous owners
- Unlike Foreclosure Auctions, inspections and mortgage financing are allowed within normal due diligence/contingency period
- House has already been vacated
- Property will usually be listed on MLS, and the bank will pay your real estate agent's commission
- REO sales close within a normal escrow period of time
- The bank will not agree to do any repairs, so the sale will be as-is
- The bank will usually require additional paperwork
- Property history/condition issues are not disclosed by the bank
Desimone, Brendon. “Pros and Cons of Buying a Foreclosed Home”. Zillow. 3 Aug 2015. 17 June 2017. https://www.zillow.com/blog/pros-cons-foreclosed-home-180916/
Nelson, Tara-Nicholle. “Advantages and Disadvantages of Buying a Foreclosure”. HGTV. nd. 17 June 2017. http://www.hgtv.com/design/real-estate/advantages-and-disadvantages-of-buying-a-foreclosure
n.a. “The Pros & Cons of Buying a Foreclosure”. HomeFinder.com. nd. 17 June 2017. http://www.homefinder.com/research/buying-a-foreclosure-72id