(DailyTreasure.com) – Purchasing a foreclosed home may sound like a bargain, but it’s important to know all the pros and cons of this particular home-buying process. Often, a foreclosed home is sold at a much lower price point than other houses on the market. This can be a great option for buyers looking for a good deal, but there are risks that should be considered before diving in.
What Does Foreclosure Mean?
Foreclosure is a process that occurs when a homeowner defaults on their mortgage. When this happens, the bank takes possession of the home and attempts to sell it at a lower price point in order to mitigate its loss. Often, a foreclosed home is in need of maintenance and repair, since the homeowner wasn’t able to pay the mortgage or other expenses.
Foreclosed homes are typically sold at a lower price point than other homes on the market, along with other perks like:
- A smaller down payment
- Lower interest rates
- Fewer closing costs
When a bank takes possession of a home, the goal is to sell it as quickly as possible. In most cases, homes are sold as-is, and with little information about the home’s condition.
Types of Foreclosures
There are several different types of foreclosures. They include:
- Pre-Foreclosure: They’re hard to find, but these homes are sold by homeowners who are desperate to reduce their debt.
- Short Sale: A home that’s sold by the lender at a lesser amount than the homeowner owes. This typically happens when the homeowners provide proof of a financial struggle.
- Auction: Homes sold as-is to the highest bidder, often without first seeing the property or assessing the repairs needed.
- Real-Estate Owned (REO) Properties: Homes sold directly from the bank, as-is, and without much information about their conditions.
- Government-Owned Properties: Homes that were originally purchased using federal loans and are now being sold through the U.S. Department of Housing and Urban Development (HUD).
How to Find a Foreclosed Home
Potential buyers may have to search a little harder for homes that are in foreclosure. Multiple listing service websites (MLS), are a great place to start. Often times, the home’s foreclosure status is listed in the property description.
Aside from MLS websites, you can find foreclosure listings and auction advertisements in the newspaper, online, or by calling local real estate agents. Search daily because homes in foreclosure are sold quickly, and usually to the highest bidder.
Pros and Cons of Purchasing a Foreclosed Home
Every decision comes with a long list of pros and cons, and it’s important to review them all before purchasing a foreclosed home. One of the biggest perks in going this route is the low price point. Homes are expensive, and if you’re on a budget, purchasing a foreclosure may be the best way to get a home in your desired neighborhood or with the square footage you need.
Aside from the draw of a lower price, there are several risks to purchasing a foreclosed home. Because they’re sold as-is, a buyer may end up with a home that needs extensive — and expensive — repairs, which can eat up all the money saved in purchasing the home at a lower price. The buying process can also be very slow. Foreclosures come with a lot of paperwork, and it can take much longer to fully purchase one from start to finish.
Finally, when a home is sold at a fraction of the cost, it will attract multiple potential buyers. This can lead to bidding wars, a drawn out process, and an overpriced home for its value.
Purchasing a foreclosed home can be a great deal, as long as the buyer goes in with his or her eyes wide open. It’s important to understand potential drawbacks and risks involved in buying a foreclosure, so you can make the right decision for your budget and needs.
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