Should you buy a property in foreclosure?

When you’re preparing to buy a home, should you consider buying a property in foreclosure as opposed to a move-in ready home? Most people don’t think about this option when they’re getting ready to enter the market, but for some, it might be a worthwhile project. Here are the key items to know about foreclosure properties if you’re thinking about taking on this purchase!

What is a foreclosure property?

 A property in foreclosure means the owner was unable to make their mortgage payments and lost the home as a result. The bank ends up purchasing the property to avoid further losses as a lender. This is not an ideal option for the home owner or the lender, so lenders will always try to work with the owner to find a solution before turning to a foreclosure.

Once a home is in foreclosure, it can either go through a Power of Sale or a Judicial Foreclosure. A Power of Sale means the lender can auction the home off with little court involvement, and the home owner can benefit from any extra balance from the sale. A Judicial Foreclosure has more court involvement, is a longer process, and usually prevents the owner from receiving any benefits from the sale. In both cases, the property goes on the market, and that’s when it’s time to ask yourself if this is the right purchase for you.

What are the benefits?

Lower buying costs

Perhaps the most obvious advantage of buying a property in foreclosure is that the home itself will cost less than move-in ready homes on the market. As we keep experiencing interest rate hikes, and housing prices are remaining fairly high, this presents an opportunity for many buyers. People who do not want to jump into the housing market at today’s prices can likely purchase a foreclosure property more comfortably. 

Why, exactly, are these properties almost always less expensive? For one thing, the lender needs to get it off their hands as fast as possible, and to do that, they must attract buyers. This means they will price the home below market value. Plus, the home may have fallen into disrepair, depending on how long it has been empty. This will further decrease the home’s value, which will reflect in its selling price.

More control over property appearance

This could be a huge benefit for home owners who value owning a property that reflects their unique style. Buying a property in foreclosure means it’s likely the home will need some renovations and repairs before it is move-in ready. This gives you a chance to customize the property to your liking in a way you may not be able to do with a standard pre-built home. Plus, you will likely have more room in your budget for these renovations since the purchase price of the home will be lower.

Potential for high ROI

If you’re thinking of buying a foreclosure property and then selling it, if you do it right you could gain a substantial return on your investment, or ROI. Purchasing an inexpensive home and fixing it up so it approaches market value will allow you to make a profit off the sale. You don’t even have to sell the home right away, either. If you want to live in it for a while, you can grow its market value over time and sell it down the line too.

What are the drawbacks?

Securing financing is harder

Foreclosure properties that need some fixing up will require extra financing. The problem is, most lenders won’t finance a home for more than its market value, leaving you in a tricky spot. How can you pay for the required repairs if you can’t secure the necessary mortgage? You may have to use a private lender, who is more likely to grant a mortgage for a home in disrepair. However, these lenders come with higher interest rates, meaning it can be very pricey to hold a mortgage for this type of property.

Renovation and repair costs are high

Even if the purchase price of the property is cheap, odds are the costs of renovations and repairs will be substantial. If the home hasn’t been inhabited for a while, or it wasn’t properly maintained by the last owner, it will need a lot of love to make it liveable again. These costs all fall on you. You could be looking at electricity, roofing, plumbing, foundation, and aesthetic repairs, which will add up quickly. It’s important to make sure these repairs are in your budget before you begin.

Buying a property in foreclosure can seem like a great idea, and in some cases, it works out well for the buyer. However, it’s essential that you think this decision through very carefully before committing to the process. You need to be ready for the work and the costs involved. If you need some guidance getting started, get in touch with a mortgage broker! We’re just a phone call away, and we can help you make sure this is the right decision for you.

If you have any questions about your mortgage, reach out to us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.