Is Buying a Foreclosure a Good Idea?

Posted by Krista Fracke on Thursday, April 28th, 2016 at 8:17am

This post will discuss the merits of including foreclosures in the home search process and cover the particulars of identifying good foreclosure opportunities.

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While buying a foreclosure might be a bit morally taxing (you feel bad for those who have lost their home), it might be your best option for entering the market and buying a home. There are a few pitfalls to buying a foreclosure, but you should definitely include them in your search when buying a home.

Merits and pitfalls of foreclosures

If a home is selling as a foreclosure, you may have a very motivated seller and you have the possibility of getting the home below market value. But, as with other homes priced below market value, there will be competition. Competition might mean that your low-priced home might not end up as low-priced as you’d like by the end of the bids. But, it is definitely worth it to try if you are looking for a deal.

While you might be getting a fantastic deal on your distress sale, know that the home will come as-is and might need significant repairs. This might be ok if you have the budget to handle these repairs and is especially ok if you are flipping the home or looking at it as an investment. These needed repairs will only increase the value of the home, which means your initial under-market investment will be worth quite a bit more by the time you are finished with it. You’ll also be able to design your home as you’d like, getting the maximum value for your money. But, if you aren’t looking to do renovations or repairs, a foreclosure could be a bad idea for you.

Banks want to move foreclosures quickly, so while they want to recoup as much money as they can, they are mostly interested in getting rid of the property. They are looking for buyers who can give cash-only offers without any conditions. Wondering if there is mold behind the walls or termites eating the floors? There is no guarantee that there isn’t, so you might have to factor this into your decision and your budget when purchasing a foreclosure.

What to look for in a good foreclosure

If a foreclosure property has sat on the market for a while and you know it is because it is overpriced, put in a lowball offer and see if the bank bites. Underpriced properties will go quickly, but overpriced properties sit and the bank might just want the home gone after letting it sit and let it go for what you offer.

When you are assessing the repairs the home needs, add the potential value to the price you’ll pay for the home and then compare it to other homes in the neighborhood. If your repairs will bring it up to market value, but you don’t have to spend a lot, this foreclosure is a good idea.

If the home is in a well-valued neighborhood and priced well under the market value for that home, buying it and repairing it will definitely be a good investment. If a foreclosure is located in a well-desired neighborhood, but buyers are shying away from it because of repairs needed, you know you’ve got a winner on your hands in terms of bringing up that value.

Foreclosures can be a scary prospect for homebuyers, but by considering the issues I’ve brought up in this article, it might mean the difference between owning a home or not becoming a homebuyer.

Sources:

http://www.hgtv.com/design/real-estate/cash-is-king-buying-a-foreclosure-or-short-sale

http://www.trulia.com/guide/home_buying/find_a_house/why_you_should_or_shouldnt_buy_a_foreclosure/

http://www.bankrate.com/finance/real-estate/7-steps-to-a-great-foreclosure-buy-1.aspx

 

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