3 Common Pitfalls - Foreclosure Properties

Foreclosure properties often present themselves as the best deals on the market. Many times, the reduced prices come because the previous borrower already paid off part of the mortgage and the bank is strictly looking to recover from the loss of the outstanding mortgage payments, which can be a very small sum compared to the original price of the property. Especially in an expensive market, foreclosure properties offer more for your dollar than other comparables. However, you should be aware there are also reasons to avoid these properties.

#1 "As Is" Purchases

The vast majority of purchase agreements on homes in foreclosure are "as is" arrangements. This means, despite what may be found in a home inspection, you are locked in to the offer you present at contract negotiation. Adding to the risk of an as is purchase agreement, foreclosure homes often have problems due to neglected management. If the previous owner could not afford to make the debt payments, then the owner likely could not afford to keep the property correctly.

These properties can have water damage, electrical hazards and need expensive fixes like new roofs and windows. Further, it is also common for individuals approaching foreclosure to damage the property out of anger with the current lender. While not all foreclosure properties are mismanaged, the vast majority will need repairs and improvements immediately.

#2 Fast Closing Dates

Most bank-owned properties have expedited time lines for closing. The banks want to unload these properties as soon as possible to get their asset sheet clean of the bad debts. In order to do so, they will put pressure on potential borrowers to close within a month or shorter. While you will often sign an as is agreement, you do have time to walk away from a property sale if an inspection turns up problems. You will lose money in doing so, but this may be the best option if the property is severely damaged. A fast closing date will give you less time to make this decision. Further, the expedited date will mean you have very limited time to arrange your own mortgage, provide your down payment for the loan and potentially sell you existing home.

#3 High Foreclosure Neighborhoods

You should be aware of the neighborhood you are moving into and not just the home. It is common for some areas to have a higher rate of foreclosure than others. If you see multiple "for sale" signs and foreclosure listings in your area, this may be a red flag about the neighborhood. First, it is possible the homes are overpriced. Second, it is possible you are moving into a neighborhood with problems. Finally, and most importantly, your home value will decrease if there are a lot of homes for sale in your area, especially foreclosed properties. In the future, when you go to sell your property, you do not want a lot of cheap real estate available for purchase in the immediate area. Other foreclosures in your area may foreshadow similar problems in the future.

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