Should You Buy a Foreclosed Home? Dismantling Foreclosure Myths
Avoid Common Misconceptions When it Comes to Buying a Foreclosure
Let’s say you’re currently in the market for a new home, and you’ve been looking for a good deal but you’re not sure if a foreclosure is too risky. More and more often, you’ve been asking yourself the question: is buying a foreclosed home the right move for me?
There are many questions involved when buying any house, and a foreclosed property may present uncharted territory for many prospective homebuyers who may have misconceptions about buying one.
By understanding and debunking some of the common myths around purchasing foreclosed homes, you can make a more informed decision about your next investment. Read on to learn more about what myths continue to exist about foreclosed homes, and what you need to know before making the decision to buy one.
A Few Common Foreclosure Myths
Foreclosed Homes Are Massively Discounted
Don’t assume that all foreclosed homes sell at extremely cheap prices. Some people have the misconception that because the former owner was unable to pay his or her mortgage, by default, the foreclosed home will be sold for next to nothing.
In fact, because the bank is looking to recoup some of the money lost in the last situation, it’s not guaranteed that they will severely discount the property. Most foreclosed properties do, in fact, sell for an average of 25% below market, although the pricing ranges vary based on the circumstances of each specific property.
Foreclosed Homes Are in Bad Condition
Another common myth about foreclosures is that they’re likely to be gutted and trashed. While the stories of foreclosed homes missing pipes and plumbing are more likely to stick in your mind, they shouldn’t be taken as the rule for all cases.
Most homes that have been foreclosed on do not involve the homeowner simply walking away, and neglect is generally a far less common issue than people may think regarding foreclosure.
Like other homes you might find on the market, foreclosures are likely to need some cosmetic renovations to align the house with a buyer’s ideal vision of homeownership. These renovations, like new flooring or bathroom remodeling, are relatively small and potentially necessary for any home you might purchase.
However, you may actually want to invest in a property inspection. By having the main utilities and features of the home professionally inspected, you can be sure of what you’re getting into down the road.
One partial myth about foreclosures deals with home inspections. Some people believe that you can never get a home inspection on a foreclosure, but this is only true in the case of county auction foreclosures. For bank-owned properties, the bank will almost always make it possible for potential buyers to get any and every home inspection that they want to.
Banks Are Desperate to Sell These Properties
While a bank may certainly not be pleased about having a foreclosed property on their hands, nothing incentivizes them to act desperately. In point of fact, the bank loses nothing by holding onto a property until they can get a fair price, so don’t expect the bank to simply give away the home.
There are also common myths about the “shadow properties” that a bank is holding onto. Some people will wait on investing in a home on the faith of “all the best deals waiting in the unlisted properties.” Banks do likely have unlisted properties, but they generally hold on to them. By holding onto the shadow properties, banks can avoid flooding the market so that they can sell these properties at a regular rate.
Furthermore, the banks aren’t looking to put themselves in a position to have their property foreclosed yet again. Some people believe that even with bad credit, they can work with the bank to purchase a foreclosed home. Again, don’t think of the banks as being desperate. The reality is that they have little to no incentive to act like they are, and they will likely avoid placing their accounts in a vulnerable position.
You Have To Pay For a Foreclosure in Cash
This myth is another partial truth. When it comes to county auction foreclosures, you may very well need to provide a cashier’s check and buy the whole property at once. But with a bank-owned property, mortgaging and more traditional payment options are usually available.
In rare cases, the bank will also be incentivized to find someone who can pay cash, but that isn’t necessarily the standard. According to Wells Fargo, about 60% of foreclosed properties are purchased with financing.
Foreclosures Happen Fast
This common misconception is simply untrue. Foreclosure is a long process that can take many months. Usually, by the point at which a foreclosure is on the market, the process is in the final stages, but it can still take time.
Even a short sale, named for “quickly” nipping a foreclosure in the bud, can take up to several months. If you’re looking to move somewhere immediately, be aware of the foreclosure process and the potential time delays.
Hidden Costs Associated With Foreclosure
Many people reject buying a foreclosed home because they believe there will be hidden costs involved. Most of the costs of buying a foreclosed property, however, are the same sorts of things you would encounter with any home on the market.
For example, the closing fees with the bank tend to be the same. One might point to inspection costs, but you might want to have a home inspection done before purchasing any property you buy.
One foreclosure-specific cost that might be worth investing in is a title search. By paying upfront for a title search, you can be sure that the property is cleared of any and all liens. Because liens travel with the property, and not the owner, resolving potential liens or title issues before purchase is always in your best interest.
Knowing the Truth About Foreclosures Before You Buy
Buying a home is a big move, no matter what kind of property you’re looking to purchase. There are a lot of questions to ask of yourself, as well as the other people involved along the way. Further, it can be especially tricky to get clear on all the details when dealing with a special-case home like a foreclosed property.
By starting with debunking some of the common myths around buying a foreclosed home, you can save time and get what you need to know to buy the home of your dreams.