Buying a foreclosed home: Pros and cons
Before looking at the pros and cons of participating in a foreclosure auction, it is important to define foreclosure. Foreclosure refers to the process where mortgage companies take possession of mortgaged property when the mortgagor fails to meet his/her mortgage payments. As a real estate investor, you can make a lot of money buying foreclosed homes. If have done it countless times.
You must however be equipped with the right kind of information. In this article, our focus will be on the pros and cons of buying foreclosed homes at foreclosure auctions. Months after home buyers default on their home loans, mortgage companies attempt to sell the property at foreclosure auctions. Such auctions have a number of pros and cons from an real estate investor’s perspective. Below is an in-depth discussion of the main pros and cons of participating in such auctions.
- Cheap price: Foreclosure auctions usually motivate mortgage companies/lenders to sell foreclosed houses at cheaper/fair prices in an effort to attract as many buyers as possible. Such auctions offer real estate investors an excellent opportunity to buy cheap property.
- Full disclosure benefits: Foreclosure auctions usually have auction terms which disclose auction closing dates. This disclosure is very important because it eliminates the guesswork that is involved in contingency-based home sales.
- Due diligence benefits: Foreclosure auctions are also characterised by comprehensive due diligence information on all properties being auctioned. This makes the work of potential investors easier since they don’t have to spend a lot of time and resources doing their own research.
Foreclosures auctions don’t come without cons. Below are some of the main cons.
- Cash payment for winning bids: This is one of the most notable cons of participating in foreclosure auctions. In case you place a winning bit, you have to pay cash or cashier’s check since all sales are final. Also, there is no room for further negotiations.
- Bidding wars: Since foreclosure auctions are known to offer excellent real estate investment opportunities, they attract very many savvy investors who can easily engage in bidding wars with competitors when they are determined to buy certain properties. You may therefore be left empty-handed in case bidding wars dominate.
- Narrow inspection window: Although foreclosure auctions are governed by auction terms which require full disclosure of due diligence information of all properties on sale, potential buyers can’t inspect property unless they carry out the inspections during preforeclosure. This obviously introduces a number of cons i.e. you may be forced to buy property you wouldn’t have agreed to buy had you carried out thorough research.
- You buy vacant property: By foreclosure time, property is usually left vacant for a sometime. You may therefore find filth, missing appliances, climate related deterioration, damaged plumbing and wiring etc. in addition to preforclosure conditions. This con attracts additional expenses which may eat into the profits you expected to make when buying foreclosure property.
- Eviction problems: Participating in foreclosure auctions also exposes you to the problems of having to forcefully evict lingering residents from your new property. The eviction process offers lingering residents enough time to trash property or simply strip it for quick profits.
In summary, participating in foreclosure auctions can be very profitable if you know what you are doing. Although the process appears to have more cons than pros, you can maximize your chances of making profits by doing through research during preforeclosure.