Advantages and Disadvantages of Different Foreclosure Purchase Scenarios
Today, according to RealtyTrac, the median sales price for a foreclosure property is averaged out to be 36% lower than that of a non-distressed one. The comparison in dollar amount is $127,000 vs $200,000. So, why aren’t people buying them?
Distressed properties can be a great bargain for many buyers. However, there are a few downfalls seen by those who would rather pay the extra money for a non-distressed property.
What many first-time home buyers may not understand is that, foreclosure homes can sometimes require repairs that they may not have the time or money for. Whereas, some homeowners go into the market looking to find a home in need of some TLC for a lower price. Yes, some foreclosure homes may need some work done on them, but it is a great way to add value to an existing home.
Before ruling out which type of property is best for you, there are a few things to consider. Among the little disadvantages of a distressed home, there are also many advantages as well, depending on the seller’s current scenario.
Advantages of Foreclosure Home Purchase When the Homeowner is Motivated to Sell Due to Mortgage Debt
- Since the current homeowner may be in a hurry to make a sale on their property, you may be in luck for a below market price bargain.
- Sometimes if you negotiate with the seller, they may agree to complete a few repairs for you.
- The seller may be able to help pay for some of the closing costs and fees.
- You may be able to use a regular mortgage loan to purchase the property.
- The seller must disclose the history of the property, conditions, and needed repairs at the time of selling.
Disadvantages
- The seller may not be able to work out a better deal than the asking price. The reason for this, a lot of times is due to their current outstanding balance on the property.
- Another disadvantage is when the seller hasn’t moved out yet prior to selling the home, so the new owner may have to wait to move in.
Advantages of Post-Foreclosure Home Purchase From Lender Owned Real Estate (Bank-Owned Property REO)
- More negotiable when it comes to pricing, closing costs, escrow and even down payment as the bank has high motives of selling the property off.
- Clear title with no liens or back taxes from previous homeowners.
- The home is vacant and ready for a quick move in.
- Bank usually pays for the Realtor’s commission.
- The sales transaction is often times able to close within a normal escrow time frame.
- Mortgage financing and inspection is within normal contingency period.
Disadvantages
- It is an “as is sale”, meaning that the bank is not responsible for paying any repairs.
- Bank is not entitled to disclosing the property’s history or issues with living conditions.
- More paperwork involved.
Advantages of Pre-Foreclosure Home Purchase Resulting From Homeowner Default (Notice of Default)
- A motivated sell, meaning that it may be easier for buyers to negotiate to a bargain steal.
- The buyer is usually able to complete all standard inspections in which includes research of the title during the contingency period.
Disadvantages
- Buyers may have to wait for seller to move out, prolonging the move in process.
- The lender must approve the price negotiated along with the terms of the sales, unless the price negotiated will cover for the whole mortgage and closing costs in full (short sale).
- Short sales usually can take anywhere from 45 to 90 days to close.
Advantages of a Foreclosure Auction
- Paying in cash gives the buyer more chances among all other competitors willing to pay with a loan.
- With an auction, you may be able to get the home for the lowest price possible due to it being sold only for the outstanding balance that the prior owners owed.
Disadvantages
- A mortgage loan is not allowed in most foreclosure auctions.
- No inspection is required or allowed prior to auction.
- It is in the buyers best interest to research the property title, since there may be back taxes and other mortgages that other liens owe, in which case the buyer would now be responsible for.
- There may be damages to the property from previous upset owners.
- The bank is not required to disclose any information on property history or its current conditions.
- The buyer must oblige to paying attorney fees or commissions to the Realtor.
- The bank may try to buy the property themselves if they know that the bid offer doesn’t cover the outstanding balance or is not reasonable.
There are several different scenarios when it comes to the sale of a foreclosure property. By considering all the pros and cons of the different types of foreclosure scenario transactions, you may now be able to differentiate which one you would be able to take on.
Despite the disadvantages of being responsible for some of the fees that a foreclosure purchase may come with, most of the time it is worth it, if you include in the low price of these homes.
Jessica Lucas
