You are making a mistake from the get-go if you think the due diligence for buying a foreclosure is exactly the same as that for purchasing a regular home. While foreclosures are often considered bargain deals, savvy buyers look beyond the irresistibly low offer price. They know how particular problems that foreclosures possess may affect their bottom line.
If you are in the market looking for a foreclosure, here are top 8 mistakes you must avoid at all costs:
Ignoring The Property’s Condition
Let’s say for example you want to a buy a semi-detached house that is under foreclosure. You conducted a comparative market analysis (CMA) and found the asking price was 15 percent below the market value.
If the market value is $300,000, you will get it for $255,000. A saving of $45,000 looks irresistible, but do you know if the house has a leaking roof or some major structural defect, it can cost you more than $45,000 just to restore it? Add kitchen or bathroom remodeling to the expense, and you end up with a property that is a money pit.
Foreclosures often go into despair because distressed owners can’t afford to pay for maintenance and repairs. In some cases, homeowners take out their frustration by removing appliances and fixtures and even indulging in vandalism.
If your target property has been vacant and is in a crime-prone area, it may fall prey to vandalism. Don’t be surprised to find graffiti, broken windows and gates and other similar damages. You should anyway be wary of buying in a crime-prone area.
Hire a home inspector to make a professional assessment of the property’s condition. Find out how much it will cost and how much time it will take to restore the property. A professional home inspection is particularly important because lenders are usually not obliged to make ‘seller disclosure’. Since banks don’t know of the defects with the property, they are not required to disclose them.
Add the potential restoration expense to the total property acquisition cost and determine if it is still a good deal.
Not Having Your Finances In Order
Even before you start your hunt for a foreclosure, you should have your finances in order. Getting pre-approved from a lender should be considered the minimum requisite. If a foreclosure is a good deal, you will have to face a lot of competition, mostly from real estate investors who make cash offers. If your offer is contingent on financing, cash buyers may be given preference.
Not Being Prepared For Closing Delays
The process of a property’s transaction may drag on for weeks, even months in some cases. Lenders may take a lot of time considering offers. The escrow process is also comparatively complicated.
Banks are in the business of financing, not real estate, so they often outsource their foreclosed properties to real estate brokerages and agents. Some agencies specializing in representing banks in foreclosures cases have lots of properties to sell off, so they often fail to prioritize a particular deal, hence delaying the closing. Besides they would want to consider lots of offers so that they could get their clients (lenders) a good deal and remain in their good books for getting more business in the future.
If you are in a hurry or have a tight deadline for buying a property, you should think twice before putting your money into a foreclosure.
Not Being Prepared For Unforeseen Legal Hurdles
The process of a foreclosed property’s transaction is regulated by laws in every state in the U.S. The laws are state-specific. It’s a judicial process in some states, while it is a non-judicial one in others.
You have to familiarize yourself with the laws or hire a professional help (more on this later) to know what to expect from a deal and how to proceed with the transaction.
For example, many states give homeowners the right to redeem their mortgages for a period of time after the foreclosure sale, typically by paying the foreclosure sale price, plus interest and other allowable fees, to the foreclosure sale purchaser.
In another scenario, legal complications can rear their ugly head if you are buying a home is part of bankruptcy. Such properties represent their own unique challenges and operate by a completely different set of rules required by the US Bankruptcy Court.
Not Having Professional Help On Your Side
You should hire a real estate lawyer or an agent specializing in distressed properties to help you get through the complicated process of buying a foreclosure.
Foreclosures involve additional paperwork and purchase contracts are typically very complicated due to the clash of interests between the lender and the owner with regard to the property’s title.
If more than one lender or individuals have liens on the title, the transaction becomes further complicated. While one party having interest in the title may agree to the sale, the others may not.
A real estate lawyer will be able to dispense professional advice to help you deal with unexpected circumstances in a foreclosure deal.
Even if you have prior experience of buying a regular home, you should proceed with caution when it comes to foreclosed properties. The most important thing to remember is each and every transaction may play out differently due to unique circumstances. If you are careful, you care surely find a great foreclosure deal.