Tips On Buying A Foreclosed Home From A Bank

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Most people who buy homes in the United States do so by securing a home loan. Home loan agreements require the homeowner to make monthly mortgage payments on their loans for a period lasting as long as 30 years. When homeowners fail to make their mortgage payments, the lender can foreclose on the loan. This means that the lender takes ownership of the home and sells it at a public auction.

Real estate investors have long found it profitable to purchase foreclosed homes through such auctions. Additionally, prospective homeowners can often get a home at a bargain at a foreclosure auction. However, purchasing foreclosed homes does have its risks and disadvantages. To avoid closing on a not-so-impressive deal on a foreclosed home, you need to make sure that you take the necessary precautions. Here are some tips on how to buy a foreclosed home from a bank.

Investigate The Process

The foreclosure process is highly regulated in most states, and it proceeds in a variety of ways. For example, some states carry out the repossession and sale of foreclosures through the judicial system, while others do not. In order to work within your state’s foreclosure process in a profitable manner, you must understand how it works first. For example, a deed of trust is different from a mortgage, and the timeline for the process can vary from place to place. Also, some states extend a right of redemption to the owner of the home in foreclosure, and this can affect how you look at possible property purchases. To investigate the process for your state, visit foreclosurelaw.org.

Inspect The Property

One of the principal dangers of purchasing homes in foreclosure is the fact that such properties have a higher tendency of being damaged or having other complications. For example, since foreclosures often come as part of a whole package of financial troubles for homeowners, and since they usually leave the property unwillingly, they often damage the home in some way, either through neglect or malice.

Another issue is that foreclosed properties often sit abandoned for months. During this time, vandals may come and steal valuable items such as air conditioning units. In extreme circumstances, buyers purchase homes and discover that the previous owner is still there, refusing to leave. Such troubles can make purchasing foreclosures considerably more problematic than purchasing other home properties.

Before putting money toward a foreclosure, make sure that you can inspect it extensively first. Either hire a professional home inspector to do so or follow a definitive list of things to check for, such as mold, termites, water damage and missing pipes and wires.

Calculate The Cost Of Improvements

Even if considerable damages exist, the property could still be a good investment. In fact, damaged properties can often be the best investments. If the damage is substantial enough to be clearly visible but still simple enough to be fixed easily, you may be able to buy the property at a significant discount, repair it for relatively little and sell it again for a large profit. However, to ensure that the necessary improvements are financially feasible, consider getting quotes from contractors before the bidding process begins.

Bid Like A Champ

While foreclosure auctions work differently in various places, they almost always involve multiple buyers bidding against each other. These bids may be taken in-person or over the telephone. Before the bidding starts, review the financial implications of the possible purchase. Before getting involved, decide on a maximum price that you are willing to pay for the property. Do not get so intent on beating the other bidders that you end up paying a price too high to leave any room for reasonable profit.

Consider Pre-Foreclosure Investment

The pre-foreclosure term is the time between when the bank begins the foreclosure proceedings and when the lender holds the auction. This period usually lasts about three months, and it can be one of the most advantageous times to purchase a property. However, purchasing a pre-foreclosure property comes with its own particular challenges. First, instead of dealing with a bank, a pre-foreclosure investor deals primarily with the homeowner – who is usually not in the best of spirits at this point. While dealing with homeowners in this way can be problematic, it can also be good for the investor. By providing homeowners with a “way out” – including help in finding a nice rental property to transfer to – pre-foreclosure investors can be seen as homeowners’ allies rather than as part of the system that they feel is attacking them. In return, investors can avoid many of the problems often associated with foreclosures and acquire the home at a reasonable price.

One important issue to consider when it comes to pre-foreclosure investment, however, is the matter of liens. A lien is a claim that some party other than the lender has on a portion of the property’s value. For instance, a contractor who worked on the property but never received his pay can file a lien against it. As a pre-foreclosure investor, if you purchase a property with a lien, you become responsible for paying that lien, and that can cut into your profit. Since letting the property go to foreclosure will wipe out all liens, most lienholders are willing to bargain at this point. However, that is not a guarantee, and finding all of the information on property liens can be problematic. The lack of liens is one thing that makes buying foreclosed homes at auction preferable to buying pre-foreclosure properties.

Keep these tips in mind if you are considering purchasing a foreclosed property. They can help you to avoid purchasing a lemon and help to ensure that you get the best deal on your new property.

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Last Updated: February 4, 2013
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About Ronald Kimmons Ronald Kimmons is a contributing author to CanDoFinance.com. Ronald is a professional writer and translator from Houston, Texas with a background in business and finance. He also writes educational material and various types of fiction and teaches English and Chinese as second languages.

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