Buying a Forclosure
Is The Risk Worth The Reward?
There are primarily three different opportunities related to foreclosure real estate:
Buying a home in pre-foreclosure status. (Advertised as going into foreclosure, but not yet foreclosed upon).
Buying a home on the courthouse steps at the actual foreclosure sale.
Buying a home from the lender after the foreclosure sale at the courthouse steps and the lender was the high bidder and took possession of the home.
Each opportunity has unique circumstances, requirements, challenges, and risks.
1. Buying a home from the current distressed owner may mean you have to close quickly to preempt the foreclosure sale on the courthouse steps. Based on the owner’s financial situation, the home may be subject to substantial deferred maintenance. Consequently, the home may require substantial repairs. Depending on the type of mortgage loan the current owner has, the property may also be subject to unpaid property taxes, which you will inherit with the property; the same goes for water and sewer bills. These pre-foreclosure purchases are not for the faint of heart or novice investor. Serious thought, with appropriate financial resources in reserve, are the best course of action if you are considering this type of real estate purchase.
2. Buying a home at the courthouse steps on foreclosure auction day (1st Tuesday of every month in Georgia) is typically only pursued by professional investors, and for good reason:
- Houses are sold for CASH only, and payable immediately upon acceptance of the high bid.
- There may not have been an opportunity to inspect the house prior to the auction
- Sometimes the only option to look at the house prior to the auction is limited to the exterior.
- The house may come with the previous owners still residing there. As the new owner, this is something you will have to contend with.
- Without the opportunity of conducting appropriate due diligence, there are many other potential pitfalls, such as: title issues, mechanics liens, encroachment of existing structures, property line disputes, environmental concerns, well water concerns as applicable, and many other potential issues.
3. Buying a home from a lender after they’ve taken the home back through the foreclosure process is the most typical manner of acquiring a foreclosed property for an average home owner. There are numerous reasons for this and the following are just a few:
- The home is marketed by the lender (owner) on the open market to expose it to the most potential buyers.
- These homes typically are available to access for inspections and appropriate due diligence.
- These homes ‘typically’ can be financed with a traditional mortgage (depending on condition)
- These homes are sometimes sold at a discount to market pricing, but this really varies based on the condition of the property. So, be careful that saving $20,000 on a home purchase price (that can be financed over 30-years) doesn’t just result in spending $20,000 in cash now just make the home livable.
- Sometimes the lender/owner refuses to have the utilities turned on for inspections, which increases the risk of buying these homes. Caution is appropriate here.
- Sometimes a foreclosed home is in such disrepair that typical mortgage financing is not an option. This makes a cash sale a must, or other more expensive sources of financing (hard money lenders, purchase and rehab loans that must be quickly replaced by other financing, etc.)
Whatever course of action you may be interested in, hiring a professional U.S. Veterans Realtor to assist and guide you is the wisest decision you will likely make. Don’t forget, buying a typical home is probably the biggest purchase of a lifetime. Purchasing a home through one of these more challenging processes adds substantially to the risk of things turning out badly.