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Disadvantages of Buying Foreclosed Homes

Johns Wu Posted in Foreclosures by Johns Wu
July 23, 2007 04:17 AM - 5 Comments

DISADVANTAGE FORECLOSED HOMESWith the cost of purchasing a home rising seemingly by the minute, many thrifty buyers are enticed by the prospect of buying property at less than market value. One of the most common ways to do this is to purchase a home that has been foreclosed on by the mortgage lender. Most of the time, you will get a great deal on your house. However, there are still some things you should keep in in when buying foreclosed homes.

First and foremost, foreclosured homes are auctioned off to the highest bidder. Interested bidders are generally required to show proof of financing and must have a minimum ten percent cash deposit before they are qualified to bid. If you are not prepared to shell out a lot of cash before you leave the auction site, then plan to attend the auction just to watch.

Second, and probably more importantly, you are purchasing the foreclosure property as is. This means that any repairs that the home will need, and any code violations that the code may have are completely your responsibility. Bear in mind, that if the previous owner was unable to meet the financial obligation of their mortgage, they may also have been financially unequipped to deal with basic property maintenance. As such, you may be purchasing a home with could require a substantial investment before it is even in livable condition. Some foreclosure sales do not allow an inspection of the property, and, if you can do an inspection, you may have to do so with all of the electrical, water, and gas systems shut off as the mortgage company will not generally pay to keep the utilities on. Therefore, you will have no way of knowing what shape the home’s major utility systems are in.

Third, if the mortgage lender has not initiated the process of eviction, it will fall to you as the new owner of the property, to evict the previous owners, tenants, or whoever else may have been occupying the property. In some cases, the previous residents have already vacated the premises, but have inflicted intentional damage upon the property before doing so. It is not uncommon to purchase a foreclosure that not only needs to be cleaned out, but has been completely stripped of its interior.

Although the benefits of buying a foreclosure are numerous, there are also some drawbacks that may keep some eager buyers from taking the bait. Buying a foreclosure is a gamble that pays off for some and not for others and it is certainly not for the faint of heart. However, buying properties at foreclosure auctions can also be a great way to pick up a valuable property for a fraction of its value making the process more appealing to a wider number of home buyers.

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  1. KJones said:
    on July 26th at 02:25 pm

    I’ve been to several estate and/or foreclosure auctions and there was a man at one of the auctions that bought a small 4 room house.

    I attended this particular auction to buy some old dishes, and to just “watch”, as you put it. After the man won the bid on the house, I was walking through the house to take a closer look at a rocking chair that was up for grabs. The buyer of the house was sitting in it and he got up to walk away and when he stepped on the floor it caved in right underneath him.

    A few of us buyers were standing there in shock and the man started yelling and saying he did not want the house now that the floor had fallen in. The auctioneer told him that the sale was final, and the house was purchased “as is.

    So, I would like to add some advice here. Even if you cannot check the electric or plumbing in the place, you should take a good bouncing walk through the complete structure from top to bottom and make sure that you aren’t buying a place that has caving in walls or floors.

    I felt embarrassed for this buyer. I could see his anger after the incident with the floor, but I think he should have taken a closer check on the stability of the flooring in the building before he started bidding.

    Make a list of things to check and take it with you to the sale. Arrive early so that you can look thoroughly at what you are about to buy.

  2. Amadeus said:
    on July 27th at 05:01 am

    “Not for the faint of heart” is right!

    Ultimately, like all investments, it comes down to a risk vs. reward analysis. Buying foreclosed homes is on the whole extremely risky, and that risk should be reflected in the discount you are getting as compared to normal market prices. The discount should be such that even if every conceivable worst case scenario were to take place, you would still be getting a good deal. If you accept anything less than that, you’re essentially gambling.

    The challenge, of course, is that these kinds of discounts are not exactly popping up all over the place, depending on your local housing market. The deals are out there, but it’ll usually take stalwart perseverance, patience, and a good chunk of time to find them. But to the victors go the spoils, right?

  3. James said:
    on July 28th at 03:58 am

    Foreclosures are the ultimate “fix it uppers” and like all do it uppers they aren’t for everyone. Many people (and I count myself among them) are simply not very good at fixing up properties. The recent property boom has convinced people otherwise as the value of any property has risen just by virtue of time rather than any work done on the property.

    Different people are good at different investments. Some people have the patience and elementary mathematical ability to go spot underpriced shares - and others can do up property. Who knows, some people may really be able to spot underpriced collectables. It really is a matter of finding what investment types suit you, and not kidding yourself otherwise.

  4. ciscogrove said:
    on August 1st at 01:34 pm

    As a former real estate broker and mortgage banker, the first thing you should do before splashing around in the foreclosure pool is YOUR HOMEWORK. Many of the buy foreclosure porperty gurus don’t tell you that it may be impossible to ever get clear title. That’s right. There is either a cloud on the title that cannot be erased or during the foreclosure process some event occurred causing a cloud.

    Always check the file on the foreclosure property at the local recorder’s office. You don’t want to be surprised by a federal, state, county or city tax lien or a judgment in a wrongful death suit or any other number of liabilities that aren’t erased by a simple foreclosure.

    Next, read every State statute or code that pertains to foreclosure. Take California for example. If you don’t follow certain procedures, you could be heavily penalized.
    buying foreclosed properties can be lucrative but at the same time, it could cost you a bundle.

  5. gkr said:
    on August 5th at 12:58 pm

    The example KJones has given just explains clearly. The rates could be cheaper because of problems associated with the home. As this type of investment seems to be like a risk vs. reward type of scenario it is not meant for a first time foreclosure buyer. We have to do our home work before jumping in.

    We need to find out the current prices of neighborhood houses and lands. We have to estimate the future of the place. If that is good but the house coming for a cheaper rate, then it is ok to jump in even if the house is not so good. The land will pay in the future.

    It is ofcourse better to contact the homeowner before bidding. The homeowner may not have a phone because of his financial crisis. He might have paid taxes on the property and other charges related to that home. It means this cost will add up for the buyer.

    There are some cases where banks own the foreclosed homes and they hire a real estate agent to sell them in the traditional way. But there is possibility of buyers’ success by pestering bank loan officers with low offers.

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