Foreclosure Risks & Rewards
Buying a foreclosure property is one of the most popular ways to get
an incredible real estate bargain – plenty of foreclosure properties
sell for 30-50% below their market value. And because of these
savings, you’re able to purchase a larger home or more valuable
piece of property than what you might be able to ordinarily afford.
You probably already know that foreclosure occurs when the owner
falls too far behind in their mortgage payments. This may happen for
any reason, and if the delinquent mortgage payment and late fees
cannot be met, the property is foreclosed and given to the private
mortgage lender, or government agency that insured the mortgage –
the Federal Housing Administration (FHA) – or that guaranteed the
mortgage – Veteran Affairs (VA). The mortgage lender, FHA, or VA
will then have the foreclosure property appraised and put on the
market.
Because of the foreclosure process, you have three different
opportunities to purchase a foreclosure home. You can purchase the
foreclosure property before it’s actually foreclosed, at its public
auction, or directly from the mortgage lender who has repossessed
it.
Buying Pre-Foreclosure(or Notice-of-default, Notice-of-trustee
sale)
Sometimes you’ll be eager to jump on a deal, and may be interested
in purchasing a home before it’s been formally foreclosed. If this
is the case, you’ll most likely work directly with the homeowner
(who has defaulted on their mortgage) and the mortgage lender.
Naturally, you’re most likely to get the home when you negotiate an
offer that’s beneficial to you, the homeowner, and the mortgage
lender.
Pros of buying pre-foreclosure homes
• Average savings of 30-45% off market value.
• Chance to inspect property.
• Low cash down payments are possible
• Flexible sales agreements are possible.
Cons of buying pre-foreclosure homes
• Difficult to contact the homeowner.
• Courthouse research involved can be troublesome.
• Must complete transaction before courthouse auction.
• Negotiation with other lien holders is possible.
Buying a Foreclosure Home at Auction
Buying a foreclosure home at its courthouse auction is the second
opportunity you have in the foreclosure process. Like most other
auctions, you’re just as likely to get an amazing bargain as the
excitement of the auction may drive up the purchase price.
Foreclosure auctions are public, and are usually attended by the
original mortgage lender and other more professional real estate
investors.
Pros of buying a foreclosure home at auction
• Average savings of 20-35% off market value.
• Immediate ownership of property.
Cons of buying a foreclosure home at auction
• Property may still be occupied.
• Auctions are frequently postponed.
• Personal inspection of the property is unlikely.
• 100% of cash price is usually due immediately.
Buying REOs
When a property fails to sell at a courthouse auction – which is
fairly common, as the starting bid can outweigh the actual value –
the property becomes REO. Short for “Real Estate Owned,” REO
describes a property currently owned by the mortgage lender. The
lender takes back the property as reimbursement for the defaulted
mortgage, and usually wants to sell it as quickly as possible. This
is the last – and usually easiest – opportunity you have to purchase
a foreclosure home.
Pros of buying an REO
• Property always has clear title.
• Lender usually repairs the property to acceptable standards.
• Lender will mostly like have paid any outstanding property taxes.
Cons of buying an REO
• Average savings of 5-15% off market value.
• Low returns on investment.
First Time Homebuyer Advantages
Intimidated by the idea of buying your first home? Your first home
is a big commitment, but there are plenty of advantages to being a
first-time homebuyer, especially when you purchase a foreclosure
home. First-time homebuyers often get lower interest rates on
mortgages and the opportunity to bid early, on top of being free
from having to worry about selling another house. Realizing the
advantages of being a first-time homebuyer – paired with foreclosure
property savings – can make buying your first home profitable.
No Current Home to Sell
As a first-time homebuyer, one of your first and most simple
advantages in buying a home is that you don’t have to worry about
selling another home at the same time. While other homeowners bid on
the same foreclosure home, their purchase process may be slowed by
having to deal with selling and closing their current home, whereas
you don’t have another house or mortgage to relieve yourself of.
Always act carefully, but understand that as a first-time homebuyer
you have the freedom to move faster than other bidders.
Lower Interest Rates for First Time Homebuyers
Did you know that as a first-time homebuyer you’re offered far lower
interest rates on your mortgage than a real estate investor? While
you may be quoted an interest rate of about 6.5%, a real estate
investor will most likely be quoted at least about 8.5% when looking
into the same foreclosure home. Why? The increase in interest rate
is partly due to the fact that the real estate investor is looking
to rent the property, and the government favors owner-occupants in
order to encourage more Americans to own their own homes.
Early Bidding Window for Foreclosure Homes
You’ve got another one on real estate investors – again, because the
government is interested in having more American homeowners, the
Department of Housing and Urban Development (HUD) only allows
owner-occupants to bid on a foreclosure home the first five days
it’s on the market. Real estate investors legally have to wait until
these first five days have passed before they can make a bid. Again,
you should never rush into a real estate investment, but be sure to
take advantage of this window of opportunity.
Tax Exempt Status for Foreclosure Homes
When a property is foreclosed, it becomes government-owned. Most
states are eager to sell these homes to relieve the financial burden
of this real estate from their taxpayers. So to make buying a
foreclosure home more attractive, many counties offer special tax
exemptions to foreclosure property buyers. With the removal of fees
like state transfer taxes, you win extra savings on your potential
home’s purchase price.
Exemption of Real Estate Appraisal
Here’s another real estate fee you may be exempted from: when you
buy a foreclosure home and have the government agency selling the
home help finance your purchase, you’re not required to have the
home appraised. The government agencies allow this as they’ve
already appraised the foreclosure home, and doing so again for
mortgage purposes in unnecessary. You can also use the government
agency’s appraisal the next time you need to determine your home’s
value, adding further savings and value to purchasing a foreclosure
home.
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