Should You Invest in Foreclosures and Short Sales?

As you shop for your new home, there are a few options you naturally consider. Location, the size of the house, whether it’s a single-family dwelling or other home, school districts and – you guessed it – price.

Buying a foreclosed or short sale home can be a great way to get a fantastic deal on a new home. But, as with any purchasing decision, there are pros and cons to these options. Let’s take a look.

What are Short Sales and Foreclosures?

As you know, a homeowner never truly owns a home until the mortgage is paid in full. Until that happens, the house belongs to the lending institution that financed the loan.

Unfortunately, sometimes people fall behind on their mortgage payments. When that happens, the bank sometimes gives the homeowner “one last chance…” He can sell the home through a private agent for less than what’s owed.

That’s called a short sale.

In more extreme cases, the bank has actually “repossessed” the house. The homeowners have been evicted, and the home is now in the hands of the bank.

Obviously, the bank wants to liquidate the asset, so they try to sell the house. Generally speaking, the house is listed for a price that reflects what was owed on the home when the homeowners left.

That’s called foreclosure.

You can buy a foreclosed or a short sale home for considerably less than a house that’s even in the same neighborhood. In fact, it’s a great way to keep your payments low, or to buy an investment property.

Of course, there are a few “cons” associated with buying a foreclosure or a short sale.

1. There may be “hidden” fees.

Before you make an offer on a foreclosure or a short sale, you’ll need to consider the costs. Sometimes there are transfer fees, negotiation fees or other costs you’ll be responsible for. These should be considered a part of the selling price, and factored into your budget.

Liens against the home are public record, so be sure you look into those as well. Sometimes the bank wipes these liens out when the house is foreclosed, but that’s not always the case. If not, you’re responsible.

Additionally, in the case of a condo or a HOA property, check with the community president (or whoever is in charge of billing of HOA fees). It could be that the homeowners didn’t pay their annual or monthly dues, and you could be responsible for those, too.

2. It may be a fixer upper.

Consider the previous homeowner. He or she is in a bad position – maybe they only had a few years left on mortgage payments. Suddenly, the bank is informing them that all those years are for nothing, and they’ve got to move.

Some people get angry.

There have been cases where foreclosed homes have been, literally, destroyed prior to the owner’s departure. Appliances trashed, pipes, broken, windows smashed, carpets ripped up … it’s not pretty.

Now, that’s not to scare you. A vast majority of homeowners are reasonable adults, and they calmly leave the home to find a new place to live.

It’s important to note, though, the difference between short sale and foreclosure. In most cases, short sale homes will come with some “guarantees,” such as that the appliances will still be present and so on. In fact, most short sale owners still live on the property. They’re not about to destroy it.

But foreclosures are usually sold “as is.” That means you’ve got to do your part to ensure that you’ve got any costs associated with repairs covered.

3. You shouldn’t be in a hurry.

If you need an immediate place to live, foreclosures and short sales probably aren’t for you. Most homes can close within a few weeks or months. Foreclosures and short sales can take up to a year. There’s just so much red tape.

If you’ve got an immediate need for an inexpensive home or seeking equitable investment contact me today. There are lots of listings on the market that are affordably priced, and I’ll be happy to show you around.