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The Pros & Cons of Buying a Foreclosure in 2016

2 buying a foreclosed homeMortgages, foreclosures and short sales are taken in a single breath nowadays.

In fact all three are interconnected.

Whenever a buyer of a real estate property is behind his mortgage payments and is unable to pay, the property comes for foreclosure.

Here the lender occupies the property as collateral for the mortgage. To prevent foreclosure a borrower will try to minimize his loss and short sale the property.

In this section we will try to understand about foreclosure, its advantages and disadvantages and if it can be avoided.

Page Contents

What does foreclosed mean?

A Foreclosed home is one where the borrower is unable to pay mortgages as a result the lender evicts the borrowers from the property and repossess the same. Most often the borrowers themselves abandon the property. Foreclosed properties are often sold via auctions.

What are the causes for foreclosure?

Life is tough and there are times when you are surprised by some unanticipated financial problems, un foreseen medical expenditure, un expected lay off, less than cordial divorce and maybe death too. As a result you lag in your mortgage payments and eventually reach the state where the lender possesses your home.

How does foreclosure work?

Once you miss making payments for your mortgage, you are on the path to a foreclosure.  The way it works is:

  • Public notice: After missing payments for six straight months, the lender will issue a public notice which is stuck on the defaulter’s front door. This is a warning to the defaulter that the property might be evicted if payments are not started right away.
  • Pre foreclosure: This is a grace period granted to the borrower to accumulate funds to clear his debts. He can do it via short sale or pay the outstanding due altogether. In the event of nonpayment, foreclosure continues.
  • Auction: The home is now auctioned either on the property itself or on the county courthouse steps or the trustee office on a specified date. The date is notified to the public and the borrower by printing in the newspaper and posting a notice on the property. The highest bidder can buy the property in cash.
  • Post foreclosure: in the event the property remains unsold at auction the lenders owns the property and it is now known as bank owned property.

What are the types of foreclosure?

There are two types of foreclosures:

  • Judicial foreclosure

  • Non judicial foreclosure.

Judicial foreclosure: When a lender files a civil case against the borrower and the court handles the entire process of foreclosure, it is called judicial foreclosure. In these cases if the owner is unable to pay the mortgage by a specific date, the court will award the house to the lender; and no auction is needed.

Non Judicial Foreclosure: Here a lender is at liberty to advertise and sell the property in an auction without any court interference but following specified guidelines of the state. This foreclosure is also called statutory foreclosure. This kind of foreclosure is possible only when a deed of trust is signed between the lender and the borrower during the time of mortgage.

What are the two facts you should know when you buy foreclosed property?

You should know that when you buy foreclosed property you will become responsible for the past property dues too. And the property laws differ from state to state and hence you should be in the know of the rules before you proceed to buy a foreclosed home at an auction.

What does short sale mean?

They say every cloud has a silver lining and the great economic depression of this century in the US has been a silver lining for a few. With foreclosures almost becoming a norm in every neighborhood, some buyers have been able to use it to their advantage and buy property at great prices because of short sales.

When you buy real estate for prices which are far lesser than the mortgage value, then short sale is said to have occurred.  This is advantageous to both buyers and sellers because buyers enjoy a good price while sellers will be able to cut their losses moderately, a preferred option in comparison to been labeled default. This is one of the options that some house owners take to prevent their credit scores from falling due to foreclosure.

Either house owners themselves or the lenders who are still burdened by the mortgage after foreclosure can short sale a property. It takes a while for results to be seen and to make any profit from a short sale.

It is a time taking process unlike a traditional house sale. The lender should agree to the short sale amount and with the banks overwhelmed with foreclosures, the time constraint is more right now. 

What are the common mistakes during short sale?

It is definitely enticing enough to buy a property of your own at affordable price and short sales is one way of doing it. But there are a few common mistakes which you should avoid to actually benefit.

  • Not acquiring knowledge on the physical condition of the property

  • Not getting the house inspected

  • Not obtaining relevant legal and insurance details

  • Not including the costs involved for renovating the house.

Physical condition

Sometimes spiteful foreclosure property owners damage the property intentionally. Though most often neglect, vacancy and theft leave the property in dire state. Hence, always evaluate the property before investing.

Home inspection

Call in specialized inspectors to inspect the property for problems like mold, termites, cracked pipes etc. have an estimate of the costs involved for renovation of the property.

Legal and insurance details

Ensure that the property is not violating any rules of the land and doesn’t have any unapproved renovations. Often bank owned properties are not subject to disclosures so you need to do your research to be safe.

What three questions should you answer before a short sale?

  1. Can you rent the property for lesser amount than the mortgage value?

  2. How will a drop in the value of the home affect your investment?

  3. What is the renovation cost? And how necessary are certain renovations?

Just because you love a property don’t let sensible thinking fly out of the window. It is crucial that you inspect the house in person and not overlook any issue which might later spearhead a host of other issues.

What is the difference between short sale and foreclosure?

Foreclosure and short sale are the same in the broader sense because in either case the home owner loses his home. Yet, there are differences with respect to the time line and other factors.

The table below will attempt to clear the fog over these interrelated yet different methods.

 

Foreclosure

Short Sale

Reason

·         Defaulting borrower ·         Unable to pay mortgage, hence to minimize losses and keep foreclosure at bay.

Time taken

·         short ·         It is a long drawn procedure.

Sold by

·         Lender ·         house owner

How are they sold

·         By auction at a trustee sale ·         Through a realtor

Credit Score

·         Drops by 200- 400 points ·         Drops only 50-150 points

Future Loan

·         Must be reported ·         Not necessary to report

Future purchases

·         Can buy only after 5 years with certain restrictions. ·         Can buy immediately

Who sells

·         Lender ·         House owner

Paperwork involved

·         Comparatively less ·         extensive

 

What are the steps that can stop foreclosure?

Owning a home is important but keeping foreclosure away from your profile is even more important. These steps are a few ways of doing that.

  • Dig into personal belongings, jewelry and any other valuables and trade them for cash.

  • Reach an agreement with the lender to modify your loan terms so you do not default.

  • Opt for refinancing your loan before you start missing payments.

  • You can sell the property in the event you are unable to amass sufficient funds for making payments. By selling the property you will get a better price and you will have a clean credit record too.

2 what does short sale meanPros of Buying a Foreclosure

  • You can buy property in a desired neighborhood at a lower price which otherwise might not have been possible.

  • If the property was bought at a price lesser than the neighborhood the value of the property will appreciate more than the others.

  • Auctioned homes can be bought in cash only; this reduces the competition in the field.

  • Banks and the financial institutes do not like to hold on to foreclosed properties, as a result if you can bargain well, you might end up with a great deal.

Cons of Foreclosure

  • Most often foreclosed homes require extensive repairs to make them inhabitable again. The property may be ridden with mold, wood rot and other repairs that will be expensive and should be accounted for in your budget

  • It is a long drawn process. There is a lot of documentation involved and the communication between the bank and the borrower is sluggish.

  • The property might have been vandalized and might be damaged severely too.

  • During auction you do not have access to seller disclosure. As a result you are left in the dark of any additional problems in the house which a typical inspection fails to reassess.

What are the tips for buying a foreclosed home?

Though the overall scene is gloomy for most, there are some who can make hay when the sun shines by buying the foreclosed properties at really low prices. Here below are some tips on how to buy a foreclosure:

  1. Plan your budget: It is crucial that you plan your expenses when considering buying a foreclosed property. Ensure that you have covered all possible expenses related to the property – does the house need renovations and if yes how much do they cost. Do you know who can do it and will you be able to afford not having a tenant after the expenses incurred?
  2. Inspect personally: Now it is possible to acquire a property online but it is always better to evaluate the condition of the house in person and in fact get a professional inspector to assess the house. Moreover it is easy to get loan for a bank certified report on the condition of the house.
  3. The role of the neighborhood: Before you actually buy the property, survey the neighborhood. Any neighborhood rife with crime or other foreclosures is ominous. Remember you should be able to recover your costs on renovation at least.
  4. How long was the house was vacant: It is common knowledge that empty houses run down faster and reach deplorable state sooner than occupied houses. The plumbing, sewerage and external walls will show the first signs of decay. The rotting wood often escapes notice too.
  5. Winterization: Your aim must be to bring your costs down. Hence during inspection check that the house is winterized to prevent cracking of pipes which will lead to eventual wall damage.
  6. Landscaping woes: Often to enhance the value of the house people indulge in elaborate landscaping but when things go overboard and they are struck by the inevitable foreclosure the house is neglected. Untrimmed foliage, cracked pave ways and a rundown appearance bring down the value of the house.
  7. HUD houses: They are up for grabs six months after foreclosure. These houses are in better condition and are more reliable buy.
  8. Returns are possible only with care: If you think you can make profit by buying and reselling a foreclosed property quickly, then you are mistaken. The condition of the house and any previous taxes play a role in determining the true home value.
  9. [PDF]Buying Foreclosed Homes Tips & Myths – Keller Williams Realty

Where can you know about foreclosed homes to buy?

Google is always there to show the way; though the best way to know about units in your locality would be to contact an agent who specializes in foreclosures. This step is crucial because foreclosure sales are different from routine real estate sales.

Next you can look out for legal notice in the newspaper or foreclosure ads from VA and federal Housing Association or FHA. County courthouses are other options that offer information on the foreclosures in your region.

Conclusion

To own a foreclosed home can be a great move or a terrible mistake. You can never be too sure when you are buying a property that is up for foreclosure. Take your time to gather as much knowledge as possible before you decide. Do not scrimp on the inspection, because this is what will save you thousands later. Seek professional help to make the right decision.

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