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What to Look Out for When Buying Foreclosure Property

    Extra Expenses

    • Foreclosed homes are usually in some form of disrepair. If the owners could not make their mortgage payments, it is likely that they could not afford to keep up with maintenance either. You may have to spend a lot of money to make the home livable, so factor in the cost of repairs when considering the purchase price.

      Forecloses often come with encumbrances such as judgments, liens and other attachments that you may have to pay to obtain the property. It is wise to conduct a title search or hire a title search company to research the property so you can make an informed decision prior to purchasing.

      Be prepared to own a home in a declining market. Many times foreclosures occur in a down market, which will make the property worth less. You need to determine as best you can if the property will bounce back before you want to sell it.

    Stages of Foreclosure

    • There is a process to foreclosures, with different outcomes for buyers, depending on the stage in which the purchase occurs. The stages are preforeclosure, auctions and real estate owned (REO) properties.

      Preforeclosure happens when the homeowner defaults on the mortgage and the lender files a public notice. Buyers can find homes in this stage in a public records office, the newspaper or from online or other firms that track this. The seller is usually selling the home "as is," meaning you can expect to have to make repairs. There also may be judgments against a property in this stage. However, many experts say this is a good time to buy, especially if the home is not yet on the market. You will have less competition and the homeowners are probably motivated to sell.

      After the preforeclosure time passes--usually after several months--the lender will try to sell the house at auction. Auctions usually require you to pay in cash on the spot, and all sales are final. If you are inexperienced and enter into a bidding war with more savvy investors, you could end up empty-handed or with a property that is worth less than what you bid. In addition, you typically cannot inspect properties at auction, so there is no time to run comparables or conduct a title search. Buyers often find the homes acquired at auction turn out to be in major disrepair with missing toilets, sinks and wiring and general deterioration. Even worse, you may have to evict the prior owners, who may vandalize the property in retaliation. However, for an astute buyer, great deals can be had at auction. The best way to get the good deal is if you can inspect the property to verify its value.

      REOs are properties that the lender could not auction off. The disadvantage here is that buyers must work with the bank, and banks are notoriously hard to work with. They want top dollar, they are unresponsive, and can make you wait weeks before they respond. However, when the bank owns the property, you will have time to inspect the house and the original owners will be out.

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