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What Makes Buying A Foreclosed Property Risky?

Richard Latimer

September 1, 2021

If you consider buying a foreclosed property at your next auction visit, you may be trying to figure out: What Makes Buying A Foreclosed Property Risky?

In this article, we will explore the pros and cons of foreclosed property buying and how you can eliminate those challenges, as well as whom to get in touch with to find a real estate auction.

A foreclosure takes place when a homeowner fails to pay a mortgage or taxes. In this case, real estate goes up for auction or becomes the property of the lending bank or a federal agency.

Foreclosed buildings/homes tend to be underpriced, but carrying out a thorough investment analysis is a key step to ensure you reap full benefits from these homes.

Buying a foreclosed home can provide you with the opportunity to generate a high return on your investment. However, this strategy of home buying produces several risks.

Generally, this is because you may find a long list of unwanted problems if you’re not careful enough when carrying out your investment analysis.

How the foreclosure process looks

When a homeowner cannot pay their mortgage and a series of warnings have been issued,  the foreclosure process takes effect.

Each lender will have a different policy on how many months you can miss a payment without repercussions. It can be as few as two to three months late. Though according to the Consumer Financial Protection Bureau, 120 days late is the most common.

If a homeowner surpasses their threshold for late payments, the lender will issue a public notice, referred to as a Notice of Default(NOD). A NOD is a recorded document which states you have failed to pay your mortgage.

After the NOD has been issued, and if there is no record of payments, a notice will be given to you directly warning that you are approaching the foreclosure procedure.

Usually, a grace period is offered, where the homeowner can set up a payment arrangement to pay the amount owed in installments. This is commonly known as the pre-foreclosure process, and if the debt has been fully paid off, the foreclosure process ends.

Unfortunately, if a payment plan can not be negotiated, the house will go up for auction. If nobody buys the property at the end of the auction, the house becomes bank-owned or real-estate owned.

đź’¬ Did You Know: It's possible to stop your property from becoming foreclosed if you contact your lender when you've missed a payment as soon as you possibly can. Avoiding a lender will not diffuse the problem. Being honest is the best way forward.

What Makes Buying A Foreclosed Property Risky?

Extreme damage

If the previous homeowner fell behind on mortgage payments, chances are they also could not afford to repair water pipes, termite damage, broken garbage disposals, or anything else.

New owners may face mold problems, roof leaks, a power outage, dead or overgrown grounds, and many other issues.

Bearing these things in mind, such properties usually lack cleanliness. As they have been unoccupied or empty for a long time, these properties tend to be very messy. In some cases, previous owners intentionally neglect tidiness as they know that they’ll have to move out soon.

These small problems can turn into a problem. Lack of basic maintenance makes a foreclosed property almost destroyed. Repair costs might accumulate very fast, so you will have to spend a lot of money to make the house livable.

An Abandoned Room With Drawers And Bits Of Paperwork Scattered On The Floor- For Article What Makes Buying A Foreclosed Property Risky?
Unsplash.com

Poor-quality renovations

Unfortunately, some people make structural changes without getting the necessary permits.

If the previous owner illegally converted the garage into a living room or installed more windows, it will be your job to deal with the consequences of those actions. Structural changes may not only be unwanted to you but can also create problems with local government officials.

Additionally, there might be partially completed work inside. While some rooms may be redecorated, others may not be updated in decades.

đź”” Key Insights: Previous owners may make changes to the property's structure without seeking permissions. Once the property is in your hands, you will be responsible for dealing with these issues legally.

Above market value

One of the biggest and most common factors contributing to what makes buying a foreclosed property risky is overpaying for your property.

Since you never really know the true condition of foreclosed properties, it isn’t easy to calculate ​​renovation costs before purchase.

Limited transparency makes it hard to estimate the genuine value of the house with high accuracy. It would help if you were careful because you must cover all past-due taxes after taking ownership. Also, note that back taxes are typical with foreclosures, so your expenses may increase significantly.

Apart from that, the competition at auction can be fierce enough to send the price far higher than it’s supposed to be. This is another reason why you can end up overpaying for the property.

Time delays

Foreclosure sales aren’t as fast and smooth as you may wish them to be. Banks sometimes consider many offers so that the buying process may drag out quite a bit. If you have a certain rental strategy, it can be disrupted by time delays. Consequently, your ability to turn around a profit may be negatively affected.

Due to intricate laws governing your region, some foreclosed properties may be significantly delayed from being made available on the market. In some states, the litigation for a foreclosed real estate lasts three months or even more.

Unresolved liens

When buying a bank-owned property, you also get the title, including any liens placed on it. Unfortunately, they don’t vanish after foreclosure, so you may need to deal with debt long after purchasing the house.

As mentioned above, one of the most frequent types of liens you might face is IRS debt. Sometimes, it claims a huge percentage of the resale price, leaving you with a minimal profit or even a loss. However, contractor liens or divorce decrees are also common.

Contractor liens occur when individuals or companies who did renovations or repairs are still owed some amount of money. The decree of divorce may place a lien because of past-due child support or spousal support.

Cash payments

Nowadays, most purchases are made via credit or debit cards via online payment systems. However, foreclosed auctions require you to pay in cash, potentially causing some inconvenience for buyers.

Besides, there is always the risk of the homeowner refusing to move out. Even if you come up with the full purchase price in cash within 30 days, as most auctions require, nobody guarantees that you’ll be able to occupy your new home in a month. 

Inability to check it

Any potential buyer cannot inspect any property that is bought at auction. That means you have no right to enter it and see how it looks inside, meaning you’ll never know what problems exist inside or outside of the property and how much it will cost to resolve them.

Even worse, the house might be already occupied by unwelcome inhabitants if it has been vacant for a lengthy period. Sometimes, new owners meet squatters, runaways, or drug addicts in their homes, which can be quite dangerous.

How to buy a home with less risk?

Now that you realize what makes buying a foreclosed property risky, such as vulnerability to damage, vandalism, and different forms of degradation- let's expound on how you can avoid these problems. To mitigate the risks listed above, you should take care of a property inspection.

If you decide to take this responsibility on yourself, you will need to pay the necessary fees. Inspectors will help you to check on the condition of the house you are going to buy. They will also find out if the homeowner still occupies the property.

However, the inspection may miss some defects if they are not obvious. For example, electrical or pipe issues often stay unnoticed.

Therefore, the best way to gauge a foreclosed home is to work with professionals who have enough expertise to assess real value. Contractors or appraisers understand how much costs you will have to spend on construction and remodeling.

🧠 Remember: Banks and the Department of Housing and Urban Development always sell homes 'as-is'. In simple terms, this means that the seller does not guarantee that everything in the property is in working condition, and the seller will not repair any damages to the property.

What bidders need to know

As noted previously, you will not be able to access a property before you become its owner. Unfortunately, potential buyers cannot walk through the property with an agent to evaluate its condition.

So the biggest problem is that you will purchase a house remotely, but as mentioned, property inspections can be carried out by professionals.

The next thing you need to take into account is your available cash. Although each auction has set requirements and payment methods may differ, it would be better to have the cash to secure your bid.

Don’t rely on flexibility. Think about money in advance to pay for the property in full just after winning the auction. Otherwise, you can lose a great opportunity.

Why turn to a title company?

The main function of title search companies is to ensure that nobody else (contractor liens or a second mortgage) has claims on the foreclosed property.

Additionally, they make sure that the seller pays for everything inside your house, so you won’t have to cover the previous owner's debts.

Title insurance gives you a 100% guarantee that all of this research is thorough and legitimate. This guarantee helps to protect you from any unexpected claims that may come up in the future.

How to find a real estate auction?

A Newly Bought Home With The Keys Recently Bought At An Auction For A Foreclosed Property
Unsplash.com

The easiest and most reliable way to find foreclosure auctions is by contacting your local government.

If you don’t want to call them, you can learn all the needed information from their websites. There are also great online platforms like RealtyTrac.com. Make sure you research thoroughly, as information can be outdated, so be attentive when using them.

If the owner can catch up on missing mortgage payments or come to a certain agreement with their lenders, you won’t have a chance to make the desired purchase.

Other valuable sources of information are local brokers and real estate agents. However, they are not usually eager to help you with live auctions because it won’t benefit them in any way.

But if you resort to an online auction, you may count on their assistance since they may earn some commissions.

Potential buyers can also use Multiple Listing Service Reports(MLS). MLS data contains all the necessary information you might need, including photos and non-public broker comments that share important facts affecting sale prices. You may get critical information from such comments covers house defects, possible financing options, occupancy, and leases.

Final thoughts

Now that you understand 'What Makes Buying A Foreclosed Property Risky?' and you have fully grasped and understood the process, we hope you feel confident to go to auction and embark on a new journey.

Before you place a bid, you must be aware of all the risks you are taking and how you can overcome each to minimize the element of risk.

If unsure, consider working with an experienced real estate agent and use trustworthy tools such as Realty Trac to find foreclosures.

đź’ˇ Key Insight: You should always try to request a home inspection before purchasing any property, so no surprises wait for you when you visit your new home.

Be thoughtful while making a purchase and carefully consider all the pros and cons of foreclosed properties before deciding if you want to explore further.

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