Buying a Foreclosed House: Benefits and Disadvantages

For most people, buying a home stands among the largest purchases they can ever make in their lifetimes. Availability of homes for sale, down payment option, the condition of the house as well as neighborhood quality are just a few of the items on the checklist of what any potential homebuyer should consider while planning to buy a house. Additionally, stress, time and money issues inevitably take a toll on anyone looking to buy a home. Although it is easier to buy or sell house fast Houston, if the house happens to be a foreclosure it could have some benefits and/or disadvantages.

What is a Foreclosure? A foreclosure is where a lender tries to retrieve the balance of a loan they had previously issued to a homeowner, who can no longer afford to make principal and interest payments on their mortgage. In such a case, the lender has several options it can pursue; including, putting the house up for auction or revising the payment schedule to make the loan more affordable for the homeowner. Alternatively, the lender, such as a bank, can take ownership of the property with the hope of selling it themselves. When a bank does this, it often uses a Multiple Listing Service to allow the public to view the home. Before buying a foreclosure, you should consider some of the benefits and/or disadvantages that might exist.

The Benefits

  1. Discounted Price

Foreclosed homes are more likely to be marked down compared to other properties on the market. This creates an opportunity for someone to buy a property at a discounted price, one that might not have been available to them if it wasn’t a marked down property.

  1. Appreciation Potential

In case there’re savings on the acquisition side, the lower foreclosed price will improve the likelihood of the buyer realizing a financial gain on their investment in the future. If the home is sold for less than the market price of similar properties on the same neighborhood, the buyer’s percentage increase will be greater if the value of homes in the neighborhood rise.

  1. Bargaining Power

Most financial institutions want to rid themselves of foreclosed properties as quickly as possible for a reasonable price. The fact is that banks are better suited to issue loans to homebuyers than they’re selling homes. Therefore, they will be willing to sell the foreclosed home at a reduced price provided they can secure as much of their issued loan amount as possible. This means they won’t hold on to the property for long because doing so will have a negative effect on the odds of them securing their loan back.

Disadvantages

  1. Unpredictable Costs & Damages

When buying a foreclosed home, the bank will neither claim responsibility for the condition of the property nor make any repairs before it’s sold. Although a home inspection report can help reveal potential problems with the house and that a handyman or contractor can provide the buyer with repair estimates, complications will later arise if the damages are not detected in these assessments. It is worth noting that homes that have been dormant for years are likely to have been exposed to elements, and carry a substantial risk of unpredictable damages. Some of the problems that might not be found during an inspection include wood rot, impaired plumbing and mold, and will call for further repairs even after the final paperwork is signed. There is also a possibility of delinquencies such as tax liens and back taxes adding to the costs of an otherwise desirable house.

  1. Slow Process

There are often complications related to lots of paperwork. Typically, foreclosures have additional documents that should be completed before the house can be sold. Secondly, response time between the bank and other involved parties can be slow, and could be too unbearable for an eager prospective homeowner. In case a serious damage is found in the house, chances are that it will lead to lower home appraisal, which in turn affects the buyer’s ability to get a loan.

  1. Increased Demand

Any property that can be acquired at a discount is likely to register an increased demand. This means increased buyer interest leads to increased competition, which in turn will leads to a bidding war as well as increased prices for a house that could otherwise have been acquired at a very low price. So, what was once a discounted home in a good neighborhood can instantly become a costly property.

Conclusion

On the surface, foreclosed houses can be very appealing. However, costs can as well be extremely unpredictable and underlying damages could make such a property less desirable. Furthermore, the buying process being sluggish might spur second thoughts in the minds of potential buyers, while the high demand and increased price of such foreclosed houses might push away hopeful buyers. On the good side, however, foreclosed homes can turn out to be incredible deals. You will pay below-market value for a property that could still appreciate after sometime, hence giving you a higher profit margin if you choose to sell.