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Pros And Cons Of Buying Foreclosures

Pros And Cons Of Buying Foreclosures

With the collapse of the housing market the amount of available foreclosures is higher than ever before. Foreclosures can be a great investment opportunity because distressed properties often go for significantly less than comparable market rates. Often investors snap up foreclosures then put in $10,000 or $20,000 in and flip the house for a quick profit. In fact, there are numerous television shows showing just this process and how easy it can be for average investors. Unfortunately, it isn't that easy and inexperienced real estate investors can get burned if they are not thoroughly informed about the pitfalls when purchasing foreclosures.

A foreclosure on a home is very much like repossessing an automobile in that the current owner goes into default and the title holder seeks possession of the underlying asset. Financial institutions however have little interest in sitting on dozens of vehicles or residences and will have them auctioned off for potential new buyers. When a foreclosure goes up for auction numerous bidders will meet at a designated place and time and bid on the available properties. If you are the winning bidder then you've just purchased a foreclosure. The catch is that foreclosures are almost always sold "as is" which puts the buyer on the hook for any complications.

Also similar to an automobile purchase, an "as is" sale means exactly that. The buyer of the foreclosure normally has no legal recourse to come after the bank or credit union once the sale is processed and finalized. This means potential foreclosure buyers must do their due diligence and thoroughly research the property to make sure there are no existing liens or judgments which could cost them money after the sale. It would be nice to think that your newly purchased foreclosure is "free and clear" of all liens but that may not be the case. When a bank takes possession of a foreclosure they are not verifying whether or not legal judgments have been declared against the property or that it was a rental and there are tenants currently residing on-site. Any potential foreclosure purchaser will want to do some research to verify that the home in question is as "free and clear" as possible.

Some complications that can affect the purchase of a foreclosure are unpaid property taxes, liens from creditors placed against the property or current tenants in the case of a rental. Most of these issues can be immediately clarified through the use of a title company or using a title search service. Since taxes and liens are legal tools they have to be properly documented and recorded with county assessors which will show up during a title or record search. If the homeowner got into legal trouble it is possible that a judgment could have been placed against the property which would need to be cleared up after purchase. Even if the homeowner never got into trouble they could have still have stopped making payments on the mortgage which includes taxes and insurance which is held in escrow. This could have resulted in unpaid taxes which would also need to be paid in order to make the property "free and clear".

If however a foreclosed property has a clean title and paid in full taxes with little to no property damage then the potential buyer could realize a great return on investment. Due to the bidding process when auctioning foreclosures, there is inherent risk from a possible inability to check out the property in advance of the purchase. Lucky individuals who are fortunate enough to purchase a foreclosed property with no problems could save up words of 20% to 30% in comparison to non-foreclosed properties on the market. This pricing advantage is why many investors and prospective homeowners will take the risk in purchasing foreclosures.

Foreclosures are at historic highs and interest rates are at historic lows and this combination makes it the best time in recent history to take the plunge when buying a home. Research and experience make the foreclosure buying process less risky which can lead to wonderful investment opportunities. There are many pros and cons to buying foreclosures but like any other large purchase or investment, the more prepared you are the more likely you are to come out ahead at the end of the day.

Image by: Photo Dean