Although foreclosed properties can often be purchased on the (comparable) cheap, they also often come with major headaches. One of the biggest unknowns when it comes to purchasing a foreclosure is what type of condition the property is in. The majority of foreclosures are sold as is, which means you're stuck with the cost of handling any repairs and surprises that may pop up. If you decide to buy a property at auction, you won't even be able to step inside the place, much less get a home inspection before you hand over your cash.
If you're looking at REO properties, you'll most likely be required to undergo a standard property inspection, which can provide some information into the state of the house. If the inspection reveals a problem, however, don't expect the bank to handle the repairs. In fact, CNN states that only about 25 percent of banks will fix a problem found during an inspection of a foreclosed property. The rest of the time, it's up to the buyer to cover the cost of repairs. Even more troublesome, banks aren't required to disclose potential problems with a foreclosed property the way everyday homeowners are.
For buyers who've never experienced buying a fixer-upper, these may not seem like major concerns, but the costs of repairing a foreclosure and making it livable can quickly add up. Keep in mind that people who are unable to make their mortgage payments probably have little left over for routine maintenance and repairs. Some angry homeowners even intentionally damage their home prior to an eviction. Add to this the problems that could pop up as a house sits empty, particularly in extreme climates, and your great deal might end up costing you more than a standard property that has not gone through foreclosure.
Protect yourself from big repair bills by taking a contractor with you when you look at foreclosed homes. An experienced professional can help you spot potential problems and provide an estimate of how much they'll cost to fix. To be safe, most sources recommend planning an additional 10 percent of the purchase price into your budget when investing in a foreclosure.
Another way to avoid surprises is to invest in a title search for the property before you buy. It'll cost you around $100, but you'll learn about any liens attached to the title. These liens -- which can include past due property taxes, second mortgages, delinquent homeowner's association dues and unpaid contractor fees -- come with the house. That means you're responsible for paying them before you move in. A title search will reveal any hidden liens and could save you big bucks when buying a foreclosed property.
Finally, make sure to invest in a solid owner's title insurance policy to protect your new purchase. This policy takes the heat off if anyone ever steps forward claiming ownership of your property. While most mortgage companies require you to take on title insurance, buyers who pay cash may have neglected to purchase this policy, leaving themselves open to big problems down the road.
- Carpenter, Dave. "So You Bought a Foreclosed Home; Now What?" USA Today. Oct. 16, 2010. (Feb. 5, 2012) http://www.usatoday.com/money/economy/housing/2010-10-16-foreclosures-buyers-concerns_N.htm
- Christie, Les. "Foreclosure Sales Still Pummeling Home Prices." CNN. Dec. 21, 2011. (Feb. 5, 2012) http://money.cnn.com/2011/12/21/real_estate/foreclosure_sales/index.htm
- Gibbs, Lisa. "It's a Good Idea to Buy a Foreclosure. Here's How." CNN Money. April 11, 2011. (Feb. 5, 2012) http://money.cnn.com/2011/04/06/real_estate/why_to_buy_a_forclosure.moneymag/index.htm
- Leamy, Elisabeth. "Buy a Foreclosed Home and Save Big!" ABC News. March 4, 2011. (Feb. 5, 2012) http://abcnews.go.com/Business/ConsumerNews/save-big-buy-foreclosed-house/story?id=13052724&page=3#.Ty6LTVw7Xit
- Mullins, Luke. "The Top 6 Mistakes of Foreclosed-Home Buying." U.S. News and World Reports. Nov. 6, 2008. (Feb. 5, 2012) http://money.usnews.com/money/personal-finance/real-estate/articles/2008/11/06/the-top-6-mistakes-of-foreclosed-home-buying
- Nelson, Tara-Nicholle. "2011 to Hit Foreclosure Record—Three Need-To-Knows for Foreclosure Buyers." Daily Finance. Jan. 17, 2011. (Feb. 5, 2012) http://www.dailyfinance.com/2011/01/17/2011-to-hit-foreclosure-record-three-need-to-knows-for-forecl/
- Zandi, Mark. "Fannie and Freddie Don't Deserve Blame for Bubble." Washington Post. Jan. 24, 2012. (Feb. 5, 2012) http://www.washingtonpost.com/realestate/fannie-and-freddie-dont-deserve-blame-for-bubble/2012/01/23/gIQAn3LZMQ_story.html