Following the financial crisis of 2007-9, the foreclosure rate was at its peak in 2010. However, this figure has declined over the years, coming down to 0.47% in 2018. This 0.47% reflects that there were 624,753 foreclosure filings in 2018 alone. There are some people out there willing to buy a foreclosed home, but they are also worried about the costs associated with it.
Foreclosure is when a house owner fails to pay their mortgage on time, which leads to banks or other lenders evicting the mortgage holder from the house. The lenders then try to sell the house to recover some of the mortgage costs or at least break even. This can be a goldmine for people looking to get a good deal on purchasing homes, but the question then arises; is buying a foreclosed home ever a good idea?
Before we get into the truth about buying a foreclosed home, let us first discuss the types of foreclosed homes.
Different Types of Foreclosed Homes
A judicial foreclosure, or more commonly known in the real estate industry as foreclosure by judicial sale, requires the mortgaged property held as collateral to be sold under the supervision of a court. This type of foreclosure is allowed in all U.S. states. It initiates when the lender files a lawsuit against the mortgage holder in light of the failure to pay dues, along with a Pendens.
In this type of foreclosure, what follows soon after the eviction is a ‘sheriff sale’. It constitutes a bidding sale system where the opening bid is always placed by the lender. The mortgage owner can take part in the bidding process but it is very unlikely that they’d succeed.
A non-judicial foreclosure, also known as foreclosure by power of sale, doesn’t necessitate the involvement of a court. Instead, it allows the lender to advertise the property and sell it either at a public auction or via normal selling practices. This type of foreclosed home is allowed in many states throughout the U.S, though find that there is room for foul play in this.
One very important requirement for this type of foreclosure is that the mortgage holder needs to have agreed to the process upon the incorporation of the loan. A power of sale clause is added into the initial agreement, in this case, giving the trustee an exclusive right to sell the property as collateral in case of non-payment.
Most states also dictate that to begin this process, the lender first gives the borrower a ‘Notice of Default.’ The notice keeps the County Recorder’s office and all other interested parties in the loop. If no action is taken by the borrower in terms of resuming payments, a second notice is warranted; the “Notice of Trustee Sale” filed 30 to 120 days later. This notice sets the auction venue, date, and time.
Strict foreclosure was historically the original method of foreclosure. This is much similar to a judicial foreclosure; however, in this case, the court gives a strict directive to the borrower to make the remaining payments under a given time.
In case of failure to do so, the lender gains the title of the property and isn’t obligated to sell it. Strict foreclosures are an option only when the debt is “underwater,” i.e., when the debt owed surpasses the value of the property.
There are various steps in which a house may be at any given time. In order, these are;
- Short sale
- Sheriff sale
- Bank/government-owned property.
Buying a Foreclosed Home – The Advantages & Disadvantages
- They’re a Bargain
Foreclosed homes are sold at relatively lower prices. The banks are interested in getting rid of the house as quickly as possible to cover costs, therefore they list it below market value.
- Clear Title – No Back Taxes, Mortgage, or Liens
Just because you’re buying a foreclosed property, it doesn’t mean you’re taking on the mortgage or the previous owner’s backed up taxes. Utility bills, taxes, and other associated costs are usually covered by the bank from the proceeds of the sale.
- Bank Will Pay the Real Estate Commission
As mentioned above, the bank bears the most selling expenses. This also includes auction costs and real estate agent commissions, making buying a foreclosed home much more attractive.
- It is an as-is Sale
Unfortunately, banks don’t maintain foreclosed homes at all. The most trouble they are willing to go through is to fence the house up to discourage vagrants from coming in. This means the house isn’t in good condition and you’re going to have to invest some into getting the house back into shape.
Banks have no obligation to let you inspect the house either, raising the bar of uncertainty significantly.
- Additional Paperwork Required
Where normally your real estate agent handles all the necessary paperwork, when it comes to banks they need you to complete additional paperwork to ensure that you don’t hold them responsible for any future shortcomings in the house.
- No House History
Banks aren’t obligated to disclose any house history or condition issues in the house, past or present. This further increases the chance of you getting the short end of the stick if you or your real estate agent aren’t careful.
- Might Face Severe Competition
In the eyes of a bank, your story doesn’t matter. Asset managers don’t get to know you, learn about your background, situation, etc. You’re simply a figure in a spreadsheet. Banks are more concerned with selling their asset at the highest possible price, so you might have to face severe competition when buying a foreclosed house.
If you’re on the market for a house, remember that you can get a good deal without having to buy a foreclosed home as well. It’s simply a matter of patience and finding the right real estate partner to help you along. FastExpert, Inc can help you find a deal for you, without you having to settle for anything short of perfect!