Should I Buy a Foreclosure as My First Home? Determining Factors, Pros & Cons
Foreclosure is catastrophic for many people but a great opportunity to bargain hunt for others. If you have no experience with the real estate market, a recently foreclosed home may seem like the perfect way to snatch up your first real home for much less than a brand-new house.
Buying a foreclosed home is just like buying a recently repossessed car. Is it in good condition? If it is in good condition, meets your needs for space and other requirements, and is priced right, then it really is a good idea. On the other hand, if the previous owner trashed the house or the lender wants more than you’re willing to spend, it’s probably better to pass.
In this article, we’ll delve into more about foreclosure, how buying foreclosed homes works, the pros and cons, and so on. Let’s dive in below with the specifics.
How Does Foreclosure and Buying Foreclosed Homes Work?
Foreclosure is a lengthy process where a homeowner stops making their payments and their mortgage lender begins proceedings to repossess the home. This can take weeks to a year or more, depending on the specifics of the contract and whether the lender has to file a civil lawsuit. Such cases are known as judicial foreclosure, which is allowed in all states but only required in a few.
Much like storage sheds, foreclosed homes are put up for auction. These homes are highly desired by small-time investors, real estate flippers, and various other entities alike. Unlike regular mortgaged homes, foreclosed homes are hard to finance and typically sell for cash. The good news is that most first-time buyers prefer new homes and are less likely to muscle in on a foreclosure auction.
Bidders typically have little to no access to the property, and unlike a traditionally financed home, the lender isn’t required to disclose material defects. If your inspector misses a serious problem and you buy the house, you’re solely liable. This is why we suggest putting a clause in the contract that allows you to walk away without condition after a property inspection.
Because individuals or companies may have access to more money or credit, you may find competing with them exhausting, if not impossible.
That doesn’t mean you shouldn’t try, but we definitely recommend picking your battles carefully and preparing in advance. A mortgage pre-approval within your budget is an absolute must if you don’t have the cash to throw down, and those can cost several hundred dollars to acquire. For cases where title searches aren’t allowed before the purchase, we strongly suggest putting in a clause that allows you to walk away from the deal if the title search comes back with any sneaky liens or other problems.
Another important thing is to conduct a title search on the home in question. The lender may have taken out lines of credit against the home’s equity and left a nice hefty lien on the property itself. Liens are insidious for inexperienced home buyers because they’re attached to the property and not the loan. Always, always, always do your due diligence—don’t be that guy who buys a foreclosure and finds out he has to pay off a chunky lien after the fact.
Pros and Cons of Buying a Foreclosure as Your First Home
There are compelling pros and cons to buying a repossessed or foreclosed home as your first house, and it’s essential that you carefully consider whether the pros outweigh the cons before even searching up foreclosures in your area. Let’s go over those below so you can make a more informed decision.
Pros of Buying a Foreclosure as Your First Home:
- You may be able to find a perfectly good or fixable home for under market price
- By buying a foreclosure and making renovations, you can instantly gain equity
- More room for negotiation than with a traditional mortgaged home
- Less competition from traditional first-time buyers
- If you get a really good deal, you can even flip the house and use that money toward a better one
Cons of Buying a Foreclosure as Your First Home:
- You have no way of knowing if the house is torn to shreds or in perfect condition
- More research required than traditional home buying
- May cost a lot of money for repairs and/or renovations
- Property may have a lien you have to pay off
- The previous owner or others may be squatting in the house, and you’d be responsible for kicking them out
- Most foreclosures can’t be inspected before the sale
- Paperwork can significantly delay the time between payment and you taking possession
Foreclosures are like used cars or thrift stores: you might get lucky and find a gem in the rough, but you have to do a lot of research to find out. If things work out, you’ve got a perfectly good house for far less than it’s worth. If not, you might be stuck with an uninhabitable and unsellable money pit.
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