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The Homeowner's Advice Blog

5 Risks of Buying a Foreclosed Home

If you are looking for a deal on a home, buying a foreclosure can be a great way to save money. In a price-sensitive market, foreclosures can be the best bet for anyone who wants to buy their own home but doesn’t want to pay full price.

When a home goes into foreclosure, it means the homeowner defaulted on their mortgage payments and had to give up their house to the lender (the mortgage company). The lender then sells the home at auction in an attempt to recoup some losses. This can mean good news for buyers looking for an opportunity to purchase homes at discounted prices. Still, if you take this path, know what you’re getting into.

The biggest advantage of buying a foreclosure is that it gives you access to houses that cost less than comparable properties on the market. This can sometimes be a considerable savings. The bank or lender who owns the home does not have the time or money to perform renovations before placing it back on the market. Therefore, buyers can get a great deal if they are willing to do some work themselves after purchase. These benefits are substantial, but you should always balance the benefits with any potential risks. Let’s look at the risks and downsides of buying a foreclosed home.

A Foreclosed Home May Need Major Repairs And Upgrades: Foreclosed homes may require extensive repairs. Minor repairs are not generally a big issue, but you could shell out big bucks if there is a major structural problem. If the property was abandoned for a period of time, it may have been vandalized or neglected. If that is the case, it could be costly to get it into the shape where you will enjoy living in it. 

Always find out how long the property has been vacant; it could have been months or even years, depending on where it was located during this time period. For example: did it flood? If so, there may be mold damage that needs attention before anyone can move in. Plus, properties may need extensive cleaning in order to be liveable, and that will cost extra money, which reduces profit margins if/when selling later down the road.

As a buyer, you should never assume that the bank will pay for repairs or inspections. Take steps to protect yourself by getting an inspection before buying the property, and make sure sufficient money is in escrow to cover the cost of repairs.

You May Have To Deal With Liens And Back Taxes: If you purchase a foreclosed home, you might find that liens are attached to it. Liens are claims made on a piece of property that need to be satisfied before the title can legally pass from one owner to another. For example, if someone defaults on their mortgage and their lender forecloses on the property, they usually put a lien on the house to ensure payment for any outstanding debt owed by the former owner.

If this is your situation, you will likely have some work ahead of you when buying your new home. There could be additional expenses associated with clearing off these liens so they don’t come back and affect your ownership down the road (or worse yet, cost more money).

You’ll also need to get a survey of the land to ensure it is free and clear of encumbrances. The seller may be required by law to provide this information before selling it, but if not, it’s up to you as a buyer to do this research yourself.

A Foreclosed Home Could Contain Hazardous Materials: Some sellers will leave behind hazardous materials that are not obvious – like lead paint or asbestos insulation – which can make it difficult or impossible for buyers to get financing on these properties. Plus, you don’t know what the house was used for in the past. You don’t know if someone had been living in it or if the house was used to conduct illegal activities, leaving behind potential hazardous items.

In addition, it is possible the seller did not leave the property in good condition before moving out. You will want to hire an appraiser and inspector before making an offer on a foreclosed home so you know exactly what you are buying and how much it will cost to repair.

The Process Of Buying A Foreclosure May Be Slow: Foreclosure sales do not always go smoothly or quickly. If the homeowner stops paying the mortgage, they’ve violated their contract with their lender, who will then take steps to reclaim the property through foreclosure proceedings. This process can take months or even years, and may involve court hearings, foreclosure auctions, and other legal issues that cause delays. You will need to have patience if you’re buying at auction – and patience is something not everyone has when it comes to real estate purchases.

You Could Have Problems Getting The Original Homeowner To Leave The Property: When buying a foreclosed house, you may have to contend with the original homeowner. Foreclosures sometimes drag on for years, and many original homeowners do not want to give up on their houses. They may refuse to leave when asked by their lender or they may even squat on the property. This can be especially problematic if there are multiple co-owners of the property, all of whom might try to claim ownership or squatters’ rights.

The Bottom Line: Before you buy a foreclosed home, it is important to understand the risks involved. Make sure you are prepared for any potential pitfalls and have contingency plans in place should they occur. As long as you prepare for these potential issues, you might just find your dream home at a substantial discount.

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