Most people think of buying a foreclosure property as a fantastic way to purchase a property below market value. This is a great option for both owner-occupied purchasers and investors to acquire a property. While there are potential financial rewards of buying a foreclosure, they come with their share of hard work, headaches and problems. Below are some things to consider when purchasing a foreclosure.
Potential Problems with the Condition of the Property
It is important to understand that foreclose properties were given up by owners who couldn’t afford to pay their mortgage anymore. In most cases, the house was not maintained properly. Also, owners who are upset and distraught that the bank is repossessing their property might take out fixtures or appliances, or even trash the property before they leave. Once they leave, the property ends up abandoned, and at times it can even be vandalized by criminals.
Another major concern could be the maintenance and cleanliness of the property, either because of how the property was left after the owners moved or because the house may have been empty for a long period of time. Here are some things to consider:
- If the owners couldn’t afford to make their mortgage payments, they won’t have had the money to pay for basic repairs and maintenance such as leaks and broken appliances.
- Properties owned by banks can be very dirty, because they often sit empty for a long period of time. Also, when properties are locked up for months, there is no air circulating, which can build up dirt and can even cause the property to develop an unpleasant smell. That’s in addition to the uncleanliness and neglect from the previous owner.
- Water damage can be a huge problem. A small leak under a bathroom sink can lead to mould in the long run, while a leak in the roof or a burst pipe can lead to major water damage. Since the property can sit empty for a long period of time and no one is coming in on a regular basis, a small water problem can turn into a disaster.
- With no one living in the property, there is often no electricity or even heat. When there is no electricity, potential buyers can have a hard time seeing some rooms, such as basements and bathrooms.
- The previous owners could have made renovations but might have not gotten the proper permits. They might have done the renovations themselves, cut corners to save money, hired unskilled labour or simply been unable to finish the renovations. Also, the previous owners might have made changes to the property that might not appeal to future owners.
- Depending on where the property is located, the lawn and landscaping might be dead or overgrown. Banks will minimize their costs as much as possible to sell the property. Depending on the area, the bank might even fence off the property if it is badly damaged.
Other Issues to Consider
- Personal property left behind by previous owners: Sometimes, foreclosed homeowners get locked out of their property before they have enough time to take their belongings. Some of those items might be furniture, clothes, trash and other items that you will be responsible to get rid of at our own cost when you purchase the foreclosed property.
- Neglect and vandalism: Vandalism by the evicted owners and criminals is not uncommon in foreclosure properties. Since the property can sit empty, the new owners could deal with broken windows, graffiti and other costly damage. Also, the previous owners could have vandalized the property by breaking down doors or windows to gain access to the property to get their personal belongings. They could even damage the property by punching holes in the walls, or ripping out cabinets, doors, wires and fixtures throughout the property. There have been times when the house has been completed gutted by the previous owners, creating extra expenses for the bank.
- Issues with the purchase: There are other issues when it comes to purchasing a foreclosed property and getting it to the move-in ready stage. Some lenders might have issues with the limited transparency that comes with buying a foreclosed property. In addition, lenders will not provide funds for a property that it is considered inhabitable, or if the appraised value comes in below the purchase price. Of course, this will be an issue if the purchaser pays cash for the property. Also, there could be time delays with the owner’s bank. While the bank wants to sell the property as quickly as possible, the offers have to go through a lot of channels and departments before the property is sold.
- Other factors: Since no one from the bank has ever lived in the property, there is a lack of knowledge about the existing problems with the property. You will have to do all the due diligence on your own by getting a home inspection completed, asking neighbours or becoming aware of issues after you purchase the property. You end up buying the property as-is. Another key thing is that since foreclosures can be a great bargain, they are very attractive to investors looking at flipping properties or fixing them up and renting them. Investors can often make cash offers or have the funds available to purchase the property; they have few or no conditions to purchase the property and can close on the property fairly quickly.
A lot of money can be made by buying foreclosures, but you should be aware of what you are getting into before you choose to buy this type of property. Buying an owner-occupied property is more of an emotional purchase, as you have to imagine living in the home. Some people have a hard time visualizing what the property will look like after it has been renovated and might not have the funds to make the repairs and renovations. Also, there can be a lot of unforeseen expenses and costs that don’t come up with properties listed by Real Estate Agents and on MLS®. Foreclosures are more appealing to investors, as they are more familiar with the process, and their buying decision is all about the numbers and not an emotional one.
If you are interested in purchasing a foreclosure property, talk to a mortgage expert to help you find the best financing option for you.