Myths About Foreclosure
In the past few years, the word foreclosure has been associated with the thought of being able to purchase a dream home for a steal of a deal. Although there is some truth to this, this isn’t always the case. There are many myths about buying a foreclosure, but in reality, buying foreclosures can be a simple process if you know what you are getting yourself in to.
Myth #1
Foreclosures can only be paid for with cash
There are many foreclosures that require cash only payment, but buying a foreclosure from the bank is just about the same as buying one from the owner. It may not be cash that gets you in the door; it will be a pre-approval from a lender. Additionally, you are not required to use the bank that's selling the home as your lender. The only exception to this is when a foreclosed home is being sold at the courthouse. Depending on which county you are in, you may be required to pay instantly in the form of a certified check. If you are not required to pay instantly, you may be given a few days to deliver the funds, during which time you can get a check from your mortgage lender, assuming you have gone through the loan process and the funds have been secured before then.
Myth #2
Foreclosures are Half-Priced Deals
It's a myth that that most foreclosed homes sell for half of what the home is worth. While you're likely to save thousands of dollars on a foreclosure, the bank that owns the home is not willing to just give it away- they have to make money somewhere. The bank is skilled at determining the maximum price they can get in the current housing market. There is a chance that this could be half of the original sales price of the home, but that doesn’t always mean it is half the value in a depressed market.
Myth #3
Foreclosures lose value quicker
Some believe that buying a foreclosed home is a bad investment because they think the homes will lose value. While there's no guarantee that any home will increase in value, buying a foreclosure gives you a better chance than purchasing other homes. Why is this? You're likely to get a pretty good deal, and will probably pay below market value for the foreclosure. This gives you instant equity in the home. In addition to this, putting in new floors, painting the house tastefully, landscaping, and adding crown molding or other decorative trim will increase the value. Essentially, any work you do to the home increases it's value!
Myth #4
Foreclosures can not be Inspected
Many times buyers believe that when they buy a foreclosure, they forfeit their right to have an inspection done on the home. This is not the case. If the decision has been made to buy a foreclosure, make sure a contingency clause that says the house must pass a home inspection with no major defects is included in the sales contract. This is no different than buying a non-foreclosure. The only difference between the two is that the bank most likely WILL NOT pay to make repairs for damages or defects found in an inspection. The buyer can choose to pay to make the repairs themselves, or they may back out of the contract if they feel there were too many damages that will take too much time and money to fix. Again, the only exception to this is if you're buying the foreclosure at the courthouse. In this case the home must be bought in “as is” condition with NO inspection.
Myth #5
Buyers who have bad credit can get financing from the bank that owns the property easier than going through another lender
While some banks that own a foreclosed home may offer incentives to buyers who use their bank to buy the foreclosure, they aren't likely to bend their loan qualification rules- this includes credit standards. The bank is responsible for payment of the home when the owner defaults, and end up owning the home again when the home goes into foreclosure. If they already have a property they are trying to sell due to foreclosure on a loan they lent out, why would they want to end up with the same property as a foreclosure again?
Knowing what you are getting yourself into when buying a foreclosure is the first step. Understanding the reality of your purchase will help make the foreclosure buying process as smooth as possible.