Are you thinking about buying a foreclosed home? Encouraged by the popularity of television home renovation shows, many people eagerly jump into foreclosure homes without understanding all of the pros and cons. Homes for Heroes is here to help you understand what to expect with a foreclosed home.
Here are six things to know about bank-owned properties before you buy.
A foreclosure home, also called bank-owned and real estate owned (REO), is a house that the lender holds because the former owner failed to make the mortgage payments and defaulted on the loan.
These properties give buyers an excellent opportunity to purchase a house in a neighborhood that might otherwise be out of their price range.
A below market price is a significant benefit of buying a bank-owned house. Foreclosures are priced based on the value of similar homes in their area, minus a deduction for substantial problems. A lender is motivated to sell the property quickly and will decide on a price that attracts buyers.
There are numerous loan programs available to buyers interested in purchasing a foreclosure. A real estate professional affiliated with Homes for Heroes will help you locate an appropriate loan. Some of the favorite loan programs among buyers include the FHA and VA loan programs.
An FHA home loan is an excellent option for those who qualify for the program. FHA requires the owner to move into the house within 60 days of purchase and live in it for the majority of the year. Also, the property must be in good condition before purchase.
The FHA 203 (K) loan allows someone to buy a foreclosure that needs substantial renovation because it combines a rehabilitation loan and a purchase loan into one. Once again, the FHA loans money to buyers who plan to live in the house rather than investors.
Veterans can access a VA loan to buy a bank owned property as long as the buyer plans to live in the house and the house is in livable condition. The VA mandates that VA loans can only apply to properties with a sound roof, mechanical system, windows, and lead-free paint. Thus, if you want to use a VA loan to buy a foreclosure, you should focus your house search on properties in habitable condition.
NOTE: The VA and FHA programs do not provide funding for investment properties.
Location is possibly the most important thing to think about when you’re considering a property. The place is permanent. The potential value of the foreclosure depends on the sale price of similar houses in the neighborhood. For example, if the foreclosure is a three bedroom and two bath house in an area where similar homes sell for $200,000, it is reasonable to assume that the foreclosure will also be worth around $200,000 if it is in excellent condition.
The right location differs for different individuals. What do you want in a neighborhood? Do you have young children in school? Would you like to bike to work? Does your idea of a sublime Saturday morning involve walking to the local farmer’s market for some freshly made baked goods?
Your future happiness depends so much on living in a neighborhood that fits your needs, that you should spend some time researching possible areas before you tour potential purchases. Don’t hesitate to ask your real estate expert for advice on neighborhoods that suit your situation. Drive and walk through new communities multiple times to gather a feel for them. The internet is an excellent resource for buyers. Also, ask friends and coworkers for their opinions on where to live.
The vast majority of foreclosures will sell in as-is condition, meaning that the seller will not make any repairs and is not responsible for the shape of the house. Protect yourself by learning as much as you can about the house before making an offer.
- Hire a professional house inspector to inspect the house. A qualified inspector looks at the roof, plumbing, electrical, heating and air-conditioning, and structure. Read the report carefully.
- Do not hesitate to engage a structural engineer to examine any potential fundamental issues raised by the home inspector.
Renovation and Repairs
Foreclosures are usually not in pristine condition. The key to happy homeownership is to make sure that the house you buy does not require more repairs and renovation than you and your budget can handle. It’s essential that you understand how much work your potential purchase needs before you make an offer. Consult a licensed contractor for an estimate of the possible cost of any renovations.
Once you have an estimate of how much it will cost to fix up the house, experts recommend that you add approximately 5-10% to that amount to a contingency budget. The extra money covers the cost of fixing those surprises that always pop up when you start taking a house apart during a renovation.
Smart renovators also recommend that you think carefully about how much of a renovation project fits your lifestyle. Do you want to live without a kitchen for three months? Does the prospect of scraping peeling wallpaper from all the rooms in your new house send you searching for a painting contractor? Make sure that you know your capabilities before you commit to buying a foreclosure.
Non-Refundable Good Faith Deposit
Unlike most good faith deposits, the money that you put down with your purchase offer is typically not refundable. Since foreclosed houses will sell as-is, the buyer cannot attach inspection contingencies. Be very sure that you want the house before you make an offer.
Finally, getting into a desirable neighborhood by purchasing a foreclosure is a terrific option for homebuyers. Buying a foreclosure home does come with unique considerations for the buyer, and it is essential that you receive experienced expert advice to guide you through the process. Sign up to speak with Homes for Heroes, and we’ll refer you, at no obligation, to a real estate specialist in your community to help you locate and purchase an outstanding foreclosure opportunity.