Four Ways To Protect Yourself When Buying a Foreclosure

Written by: Christy Rakoczy

In today’s real estate market, almost everyone has seen at least one or two foreclosures for sale in their local area. Foreclosures continue to be at record highs as people default on their mortgages due to unemployment, rates adjusting upward, falling property values and other economic problems.  These foreclosures can be a great deal for a house hunter looking for a residence or an investment property, but they can also be a major headache and can end up costing you if you aren’t smart and don’t protect yourself when buying a foreclosure.

Understanding the Foreclosure Purchase

There are two ways to buy a foreclosure property. One option you have is to buy a property during a foreclosure auction. When a bank or mortgage lender seizes a home, it is typically required to advertise and conduct an auction to attempt to sell the home and to recover the money owed on it. You can attend these auctions, which may be held at designated times on the property or on the courthouse steps, and you can make a bid to purchase the property. The highest bidder in the auctions will win, just like in any other auction situation.

Your other option is to buy a bank owned home. When a home has seized a house in foreclosure, if it does not sell in an auction for whatever reason, then the bank may simply list it for sale just like any other seller. Banks will also list properties for sale that they have obtained through foreclosure alternatives such as deed-in-lieu of foreclosure.

In either case, you are typically buying the foreclosed property as is. This means that you aren’t going to have the opportunity to have an inspection and have the homeowner fix problems in the home or give you a credit for repairs, as you would in a standard purchase transaction. Instead, what you see is what you get- and you may not even have the opportunity to really negotiate the price of the home at all depending on whether you buy at auction or directly from the bank. This is one of the things that makes the purchase of a foreclosure a risky endeavor.

Risks of Buying a Foreclosure

Buying a property in a foreclosure is risky because the property is normally sold in as is condition, but this is only the start of the risks you face. One major issue is that people who are having trouble with their bills and facing foreclosure often defer maintenance and do not keep up the home properly. This means that there may be all sorts of problems with the house- none of which you’ll be able to get fixed and some of which you may not even know about if you do not have the opportunity to have a thorough inspection performed before a foreclosure auction.

You may also be buying yourself a heap of legal trouble when you buy a foreclosure. One issue that may present problems- the homeowners may have owed money to other people besides the bank. There may be liens or claims on the property and if you do not have a title search performed, find out about and resolve liens and get title insurance, you  could become responsible for paying back taxes and other past-due debts by the prior homeowners. Of course, you could also end up stuck with the homeowners themselves because if you buy a property at auction, there may be people living there that refuse to leave and it will fall to you to go through the eviction process.

Finally, a final major problem that may exist when you buy foreclosures is that the prior homeowners may have been angry or desperate or both. It is not uncommon for homes to have been stripped clean of anything of potential value, including appliances and even copper plumbing and wires. Vindictive and angry homeowners may also do things like pour cement down toilets and into pipes.  This can significantly lower the value of your new home and leave you facing disaster.

Protecting Yourself When Buying a Foreclosure

Of course, a lot of these stories are worst-case scenarios and plenty of people do successfully buy foreclosures and make a sound investment. The key to doing this is to:

  • Ensure you have a chance to have the property inspected thoroughly so all defects are identified and so you are aware of what fixing them may cost.
  • Have a title search performed to determine if there are any outstanding claims on the property.
  • Visit the property to make sure that no one is living there and that there are no unexpected problems.
  • Work with an experienced realtor who knows the foreclosure process, understands the complications associated with financing and purchasing a foreclosure, and who can help be your guide to make sure you make smart choices.

If you do your research, know what you are buying and take care to enter into only smart transactions without getting caught up in foreclosure mania, buying a foreclosure can be a great way to get a property at a lower price than might otherwise be available to you.  Just make sure you take the right steps to protect yourself when buying a foreclosure.


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