Looking for an amazing deal on a house? Then you’ve probably toyed with the idea of buying a foreclosure. These types of sales have long been praised as an excellent way for buyers and investors to snag a great deal on a property. But there are potential risks involved with this type of an arrangement. Be prepared for the ugly perils when it comes to buying a foreclosed property.
1. Damage and Vandalism to the Home
You’ve got to keep in mind that homes that have gone into foreclosure were once owned by people who couldn’t afford to make regular payments anymore. Basically, they’ve had their homes taken away from them, which no doubt would leave anyone a little jaded. It’s not uncommon for homeowners who have lost their homes to foreclosure to vandalize the place before they finally vacate.
Whether they spray paint the walls or take a sledgehammer to the floors, damage happens. Many times the vandalism doesn’t start until after the homeowners have left, leaving the place open for criminal activity. No one’s there to watch the place, and ne’er do wells are always ready to strike when the opportunity arises. So be prepared to walk into some unpleasant environments when you consider buying a foreclosure.
2. Issues With the Actual Purchase
Sure, you might have to put up with a few physical issues with a foreclosed home, but it can still turn out to be a really good deal for you. If you’re willing to put up with certain issues and are able to fix them, you can really add some value to the property despite paying a discounted price. But there are other issues that you might have to face that have nothing to do with the physical property.
Instead, you might encounter problems with the actual purchase itself. Homes that have gone into foreclosure will likely now be owned by the bank, which means this is the entity you now have to deal with. Many times banks won’t use the purchase and sale contract from the local real estate board, nor will they necessarily follow standard procedures.
Instead, expect banks to follow their own path, and use their own contracts and processes in order to protect its interests. You’ll still wind up with the house, but the process itself could become really lengthy and cumbersome.
3. Problems With the Lender
Getting a mortgage for a traditionally purchased home can come with its own set of issues, so don’t expect the situation with a foreclosed home to be any different. In fact, expect more hurdles to jump over.
Lenders aren’t in the business of handing out cash to borrowers for a home they deem to be uninhabitable, or that is appraised a lot lower than what it was sold for. And since the home was likely vacant in the weeks or even months leading up to the sale, they’ll probably have no knowledge of any current problems with the place. That means there’s no seller disclosure statement, leaving you to have to uncover all there is to know about the home yourself.
Many municipalities have specific regulations when it comes to properly maintaining a foreclosed property, such as regularly cutting the lawn. If a bank owns the house, and doesn’t keep its end of the maintenance bargain, the municipality can put a lien on the property if it has to maintain the lawn itself instead.
A bunch of other liens could be found to be placed on the home from unpaid utilities, contractors, HOAs, and so on. If you put an offer on a foreclosure, make sure that all liens are investigated by a title officer and rectified before you take title on the property.
5. Plumbing, Mechanical, and Electrical Problems
Busted-up drywall and ripped out carpeting is one thing, but issues with the major systems in a home is quite another. Some of the most catastrophic issues in foreclosed homes stem from faulty plumbing, mechanical, and electrical systems.
Broken plumbing pipes can wreak havoc on the components of a home, not to mention leave mold behind that will render a home unfit to live in. When it comes to duct work, you may be unpleasantly surprised to find an exorbitant amount of dust and debris, not to mention rodents and other unwelcome guests.
If humidity has been left around furnaces for a long period of time, the heat exchangers will likely corrode, requiring them to be replaced at a costly expense. Any shoddy electrical work is considered to be a potential fire hazard. And in cases like this, the whole house might need to be rewired. Not exactly a cheap endeavor.
The Bottom Line
There are definitely some awesome deals out there on foreclosed homes. It’s just a matter of wrapping your head around some of the potential obstacles and pitfalls, and being prepared to deal with them head on. One thing’s for sure – don’t let a super low listing price cloud your judgement and allow you to gloss over the basics that make a foreclosure purchase a good deal.
First-time homebuyers might have their own unique set of challenges, but one thing they do’t have to worry about is dealing with the sale of a current home while looking to throw the mortgage onto another.
Unless you’ve got the cash to carry two or more homes at once, things can get tricky when it comes to repeat home buying. In a perfect world, you’d find a new home, put yours on the market, and close both deals at the exact same time so there’s no worrying about carrying two mortgages at the same time or having to find a temporary place to lay your head if there’s a gap between closings.
While this is possible, it’s not going to happen without a little suaveness on your part – and a little luck. The truth is, you’ll probably have to put up with a little bit of juggling when buying and selling at the same time.
The good news is, this doesn’t have to be a pull-your-hair-out type of scenario. You can survive the buying and selling process at the same time, and here’s how.
Get a Good Handle on the Market
Should you buy first or sell first? Depending on who you ask, you’ll get a different answer. The best way to answer this question is to start off researching the real estate market in your area.
Identify if you’re in the middle of a buyer’s or seller’s market, which will help sway your decision whether to buy or sell first. For example, if you’re in the midst of a buyer’s market, it might be a better idea to put your home up for sale first, since it might take longer to sell than to buy in that type of a market. You don’t want to be stuck paying interest on two mortgages that you’re carrying because you managed to find and close on a new home while your current home sits on the market waiting for an interested buyer.
The opposite is true in a seller’s market. In this case, looking for a new home first might be the better option, since you’ll probably be able to sell faster than find your next home.
Do Your Best to Keep Both Closing Dates in Sync
As mentioned earlier, having both closing dates happen one right after the other would be ideal, but it can be pretty tough to make that happen. But that doesn’t mean it can’t be done. There are some things you can do to try and bridge these two dates as closely as possible.
For starters, consider listing your home for sale and start the search for a new home at the same time. Research all of your options, make sure your credit score is healthy, and start getting pre-approved for a mortgage. The sooner you get your finances in order, the better.
Think about adding a contingency in your buyer contract – whether it’s the purchase agreement for your current home or the one you’ve put an offer on – to get the closing dates to line up. For the contract involving the home you’re buying, ask the seller to make the purchase conditional upon the sale of your current home. This could work if the sellers aren’t able to find a buyer in a decent timeframe. Just make sure you can give them reasons why your home should be sold quickly.
When it comes to the contract involving the sale of your home, wheel and deal with the buyer, and ask for a contingency to be added to the contract to make the closing date line up with the closing date of your new home. While this might not work with many buyers, those that absolutely love your home might be willing to make a sacrifice to ensure their name ends up on title. So make sure you paint your home is the best light possible with some professional home staging to up the odds of making this plan work.
Offer a “Rent-Back” Option
If you’ve managed to snag a buyer who wants in, but you haven’t found a new home just yet, consider offering a “rent-back” option to the buyer. In this scenario, the buyer agrees to rent out your current home to you for a stipulated time period while you continue your search for a new home. You can negotiate a lower selling price or pay rent in exchange for being able to stay in your home until you find a new one.
Just bear in mind that some lenders might have a problem with this arrangement. But this can be a lot more convenient then shacking up with your parents or renting an extended-stay hotel room, so it’s worth a shot.
Tap Into a Bridge Loan
Bridge loans are specifically designed for those who have closed on a new home before closing on the sale of their current property. In this case, you’re given a short-term mortgage to cover the down payment on your new place before you sell your current one. This temporary arrangement essentially “bridges” the gap between the purchase of a new home and the sale of an old one, hence the name.
Bridge loans are secured by the buyer’s existing home, and the money from the bridge loan is put towards a down payment on the next property. When your current home is finally sold, the loan is repaid using the proceeds from the sale.
This is an attractive option, because it eliminates any restrictions that you would have otherwise faced worrying about lining up both closing dates. Not everyone’s got the cash to pay two entire mortgages, but a bridge loan can cover them both for a temporary amount of time in an affordable way.
Just the thought of buying and selling at the same time might sound incredibly stressful, but it doesn’t have to be. With a little research and preparation – and the help of a professional real estate agent and mortgage specialist – you can totally minimize the hassle of buying and selling a home at the same time.