14 Tips for Buying a House in a Short Sale or Foreclosure
Today’s real estate market gives you more options to buy a home or property than you might think. However, there could be more pitfalls than pluses to some of them.
If you can afford to buy a home, you may be motivated by falling prices and eager sellers whose homes have been foreclosed on or people who must sell their home for less than they have to pay on their mortgages – a short-sale. But, here are some things to know before putting your offer in and going through the process.
Buying at a Short Sale
A short sale occurs when a home’s seller owes more money to the mortgage company than the house is worth. The homeowner sells the home at or below market price; the lender accepts the full purchase price and writes off the balance of the mortgage. It sounds straightforward, but it isn’t always.
Here are eight things to know before buying a home through a short sale.
- Short sale homes are sometimes, but not always, priced below market. Don’t necessarily buy a short sale because you’re certain you’re getting a deal. Ask your real estate agent to do a competitive market analysis so you know what the home is truly worth. An appraisal will be part of the process as well and that will give you a better idea of the property’s value
- Your purchase offer has to be accepted by both the seller and the lender. When making an offer, it should be contingent on the lender’s acceptance within a specific time period. Unlike a traditional home purchase, it may take the lender a couple months to accept your purchase offer.
- If the seller has more than one mortgage, it can further complicate the purchase. Obviously, you’ll need both lenders to approve the purchase.
- Because it can take so long for a lender to accept a short-sale purchase offer, it can take months to close the sale.
- Look for a real estate agent who has experience with short sales. It’s a more complicated transaction with additional paperwork, and not all agents may understand what’s involved.
- Run away from sellers who suggest you also pay them money under the table—it’s illegal.
- Know that most short sales are "as is," so a home inspection prior to purchase is essential. Since the seller has known he or she won’t make any money on the home’s sale, upkeep of the property may have been neglected.
- Buyers may have to pay some costs that are normally paid by the seller. That’s because some lenders may refuse to pay for things such as warranties, pest inspections and more.
Buying a Foreclosure
If a house has been foreclosed on, that means the lender has taken possession of it from the homeowners because the owners fell behind on their payments. There are typically three ways to purchase a home in foreclosure:
Although buyers may get a bargain when buying a foreclosure, there may be some catches. Here are six things you should know before buying a foreclosed home.
- Foreclosed homes often come with additional costs. If the prior owners couldn’t afford the mortgage payments, they may not have been able to afford to maintain the property. In other instances, owners may damage or destroy parts of the home prior to moving out. And if the home has been vacant for a while, vandals may have broken in, lived in the building or stolen things such as appliances, fixtures, pipes and wires.
- Don’t buy sight unseen. Why? See point #1.
- Find out how long the home’s been empty. The longer it’s been vacant, the more likelihood that there will be pump, mold or pest problems.
- Hire an experienced home inspector. Foreclosed homes are usually sold "as is." You want to make sure you know what potential problems and expenses you’re facing.
- Conduct a title search to see whether anyone else has a lien on the property. For example, was there a second lender? Have the property taxes been paid? Have any unpaid contractors filed liens against the home? If you buy the home, you are legally responsible for paying these liens.
- There are additional risks when buying at auction. You may not be able to inspect the property or run a title search. There may be tenants in the building. And you’ll probably have to pay for the property in full immediately.
A title search on any property you have questions on could be a good investment. Also, when you purchase a house either way, be sure to have a "clean" title so when you try to sell the house or property, you don’t have any problems.
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