“Buy this house for pennies on the dollar.” Sign me up! Or should you run the other way? Are foreclosures really a cheaper investment? Will you save money buying a fixer-upper? Does a discounted sales price mean you will pay less? Let’s look at some of the hidden costs of buying cheap real estate.
Banks are not Required to Disclose the Condition
Because the lender and their employees have not lived in the house, they are not required to disclose anything about the property. You are on your own to figure out the actual condition.
Foreclosures are sold in “As Is” Condition
Banks do not want to mess around with repairs. All they are interested in doing is getting their money out of this failed transaction. They want the property off their books with the least amount of expense. So, do not expect that you can put any type of repairs as a condition to your purchase agreement. It is absolutely critical that you get a home inspection on a foreclosure purchase.
Some Auction Foreclosures are sold “Sight Unseen”
As if buying a property “As Is” wasn’t bad enough, some auctions do not even allow the bidders to inspect the home. If they do allow inspections, it could be an hour before the auction with every bidder poking around at the same time.
Hidden Repair Costs
Even if you have had a home inspection, non-visual items are usually not covered. While there will be surprises in any home when a major renovation is in process, foreclosed homes tend to suffer from more deferred maintenance and hence hide more surprises. Finding out that the subfloor is full of termites can quickly escalate the cost of a kitchen remodel.
Not So Hidden Repair Costs
Some homeowners become very vengeful and destructive during the eviction process. Some have been known to pour concrete in the toilets, remove all saleable items including the wiring, and destroy the walls – just to name a few destructive ideas. Abandoned houses often attract squatters and vermin which can be expense to remove. Traditional purchases usually do not have this additional risk factor.
If you will need a mortgage to buy your foreclosure, be prepared to face some financing problems. First, the purchase price will need to meet minimum lending guidelines. If the property is in really rough condition, you may have trouble with the appraisal and getting the financing approved. Residential mortgages must meet certain occupancy standards. Most major lenders, however, do offer mortgages that can wrap in renovation costs into the loan.
Paying Off Liens
Many foreclosure auctions do not guarantee that all liens have been removed. That means that though the first mortgage may be the one getting paid off, any secondary lines of credit, contractor liens or home owner association dues could transfer with the title. Do your research so you know what the true purchase price will actually cost you.
Benefits of Buying a Foreclosure
So, yes there are quite a few hidden costs and considerations when it comes to investing in a foreclosure home, but there can be a lot of awesome benefits. Consider a few of them.
- You are going to have repairs and maintenance issues even if you buy a traditional home. That is just a part of home ownership and it cannot be avoided.
- Depending on your area, there can be plenty of properties to choose from.
- It is a great opportunity to make a high return on your investment.
- Foreclosures give buyers to opportunity to get in a good neighborhood for less.
- You can renovate the property and make it look like how you want.
Investing in foreclosures and other distressed real estate can reap some very good financial benefits, but you must go into the transaction with your eyes open and your wallet ready.