The location of the home you buy may dictate whether many of the myths about buying a foreclosure are true or unfounded.
If you have considered buying a foreclosed home, you’ve heard many reasons against it. Many of the negative things you’ve heard are buying foreclosure myths, not legitimate reasons that you shouldn’t consider foreclosure listings. However, these myths are not urban legends - they are true in some in some cases.
Buying foreclosure myth #1: You cannot get an inspection on the home before making an offer.
Answer: This myth is true when it comes to buying a foreclosed property from an auction. However, if it is a real-estate-owned (REO) property, or a U. S. Department of Housing and Urban Development (HUD) home , then you will be encouraged to get a home inspection to disclose problems with the house before making an offer. Keep in mind that a home inspection typically costs $300-500 so, you may spend money on a home that you decide not to buy.
Buying foreclosure myth #2: You must buy foreclosed properties with cash.
Answer: This myth can be true in some instances. An auction may require cash for the entire sale price. Or, the property may be in such poor condition that you cannot get a mortgage from a traditional lender. On the other hand, REO properties, HUD homes and many foreclosures at auction may be purchased with a home loan. This is why it is important to research the property, and the auction rules, thoroughly before buying.
Buying foreclosure myth #3: Every foreclosed property has hidden costs.
Answer: A foreclosed home can have hidden costs from needed maintenance and repairs or liens. As mentioned above, a foreclosure sold at auction may have either of these hidden costs if you cannot get a home inspection prior to the sale and do not research the property deed. However, you have the option to pay for an inspection on foreclosed properties sold outside of auctions, which will disclose any problems or needed repairs. You can also research the property deed on any foreclosed home. One advantage of buying a HUD home or REO property is that HUD is required to clear the title of liens before reselling and lenders typically clear liens as well. You still want to make sure the lender is clearing the title before you buy.
Buying foreclosure myth #4: Foreclosures sell at deep discounts.
Answer: The price of a foreclosed home may be $100,000 less than the previous owner paid for it. However, that's because prices were inflated and when the housing bubble burst, real estate market values dropped significantly in many areas of the country. So, the discount is depends on if you are comparing the sale price to today’s market or the previous sale price. Generally, you should not expect a discount of more than 25% of the market value.
Buying foreclosure myth #5: Foreclosed homes need a huge amount of work.
Answer: Not true at all. Each foreclosed property is different from the next. One home may need a huge amount of construction while the next may be a model home that the owner only had for a couple of years. A large percent of foreclosures were caused by circumstances like job loss, divorce, death and the drop in overall prices on the real estate market, so many of these homes are in good condition. Foreclosed homes are sold in “as-is” condition, so the only way to separate homes in good condition from homes that need work is to have them inspected before you buy.
Buying foreclosure myth #6: It is easier to buy a foreclosure if you have bad credit
Answer: If you have a poor credit history, then it will be harder to get a home loan for any type of home than it would if you had a great credit history. The bank does not want to sell a foreclosed home to another homeowner who has a poor repayment history because the home could end up back in foreclosure. Instead, you may be offered incentives like lower fees or credits toward your closing costs that will make your new home more affordable.
There are many other buying foreclosure myths circulating. These myths shouldn’t necessarily deter you from an opportunity. If you do your research and work with a real estate agent who specializes in foreclosed properties, you can avoid the buying foreclosed homes that have these risks. However, if these myths make you want to avoid buying foreclosures, there are plenty of traditional real estate listings on the market. A professional real estate agent can help you find both types of properties.
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