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The truth about buying a foreclosure

Zillow • Feb 18, 2013 at 4:07 PM

Not too long ago, the idea of buying a foreclosed property was something that only serious real estate investors thought about. But, since the housing market crashed a few years ago and a tidal wave of foreclosures hit the market, even traditional homebuyers are looking at this as a viable option.

Seasoned investors are well educated on the ins and outs of buying a foreclosure, but how about the rest of us? Do we really know the benefits and the pitfalls? Or are we blindly assuming that we’ll get a great deal, or a large amount of instant equity, by purchasing a distressed home? Let’s take a closer look at the truth behind buying a foreclosure.

One of the biggest misconceptions involves the value of a home that has been foreclosed. Most ordinary home buyers assume that a foreclosed property represents a bargain. They go into it thinking that they’ll buy it for pennies on the dollar and then fix it up once they are living there.

We all know that once a home has gone through foreclosure proceedings, a bank owns the property.But what some home buyers forget is that although it’s true a bank would prefer to sell the asset, you shouldn’t be fooled into thinking they will give the property away. Banks know what they are doing. Financial institutions use certified real estate appraisers to determine the fair market value of a home and they list it at that level, which consequently may not be the same amount that is owed on the house.

You should also aware that banks almost always have addendums to a sales contract that are designed to protect their own best interests. When you purchase a foreclosure it is always on an “as-is” basis. That means that any repairs that must be done to the home, and any outstanding liens of the property, become your responsibility. In simple terms, the bank will assert that they have no knowledge of the condition of the property and then they will relinquish all accountability for any necessary repairs/liens – including the cost.

What does that mean to a home buyer? Well, it means that although you might buy the property for a slighter lower price than the comparable homes in the area, you could easily end up paying just as much – if not more – by the time you’ve made all the repairs to the property. And, the dirty little secret about foreclosures is that they are almost always in very poor condition. Hiring a qualified home inspector is a must because many times they will uncover extensive damage and identify complex repairs that need to be done to the home. The key is to have the home inspected prior to signing a contract because once you’re under contract it is extremely difficult, if not impossible, to ask the bank to give you money back for any restoration efforts. And once you have a contract, you are bound to its terms even if you come across a significant defect that the bank refuses to correct. One more thing, banks like to use their own closing agent and title company during the transaction. In doing so, they may not conduct a title search to ensure there is a clean title on the property. That means if there are any outstanding liens such as unpaid HOA fees or unpaid property taxes, you will assume responsibility for that debt as well.

So although there is a sort of unspoken expectation that a foreclosed home will provide a large amount of instant equity, it simply is not true in most cases. As a matter of fact, most home buyers who begin their house hunting journey by looking at foreclosed properties, usually wind up in a conventional home sale. All it takes is a few tours of actual foreclosures and buyers start to really grasp the magnitude of what they are undertaking.

This story was written by Monte Mohr, who has sold over 2,500 homes, making him one of Americas top Real Estate Agent for the last 25 years. This experience has given him a unique perspective on the Nashville TN Real Estate Market worth paying attention to. He is also a regular contributor of real estate advice to Nashville’s NBC affiliate station, WSMV Channel 4. To learn more about Monte Mohrs experience as a realtor to get free advice about your biggest real estate challenges or to request an interview contact him at Info@TennesseeDreamHomes.com

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