Beginner's Guide On How To Buy a Foreclosed Property
The foreclosed home lifecycle is a classic example of the idiom, “One man’s loss is another man’s gain.” During the subprime crisis, the market was left with thousands of foreclosed homes, also known as foreclosed, reposed or repo homes. While such a massive inventory was unprecedented, foreclosed properties are always available in the market. If done right, this can prove to be a good opportunity for acquisition for residential purposes or investment.
So, what are foreclosed homes?
Broadly speaking, foreclosure is the result of a default. Home loans are often secured against the acquired or build property. This is known as mortgage and the loans, as mortgage loans. As per the pre-agreed terms, if the borrower defaults on capital or interest payments, the lender can seize the property. Later, the lender auctions it to recover its dues. Though the borrowers often recourse to Government help or private foreclosure assistance to renegotiate the mortgage terms, a large number of these attempts fall flat.
What are the benefits of buying repo homes?
Of all the others, here are the key advantages:
- Discounts. Repo homes are properties under distress. The acquiring lender is not as much concerned about obtaining the best value, as is about selling the house to recover its dues. You, as a buyer, are may end up with a solid bargain, but a lot depends upon your research and luck. According to an estimate, the discounts on seized property can range anywhere between 10% and 50%!
- Returns. The property market is subject to the ups and downs of business cycle like any other sector of the economy. Accordingly, the homes that you buy cheap will eventually increase in value over the period of time. Therefore, you may buy such houses purely for investment purposes also. If you can wait till the ‘right’ time and undertake some restoration to the house, you can make good profits.
- Time Saving. The huge number of foreclosures in the last couple of years has opened a wide range of options to choose from. If you need a house in a short period of time, you may not be in a position to invest in some under-construction builder homes. Keeping in mind the price economy, buying a well-maintained foreclosed home may be a better option than a new move-in ready property.
- Quality of Construction. A ‘used’ property is a better indicator of the construction quality than a newly made, glossed up one. Some of the repo homes are sold in the same condition as they were acquired, while others are refurbished before sale. If possible, get to see them in original condition.
- Maintenance. This part depends more upon how keen you were at the time of purchase. One premise is that every family maintains its self-occupied house the best they can. However, this may or may not be true, especially if the house is selling at a lower price than similar properties in the same area. Before, buying a house at throwaway prices, verify if it needs some major expenditure in terms of maintenance.
How can one buy repo homes?
Be prepared to invest some time and be more methodical, proceeding step-by-step:
- Preparation. First of all, do your budgets. Then, make up your mind about the size of the house and its locality. Taking an expert’s help at this stage could be a wise idea, but may involve some costs.
- Time horizon. If you are buying for the purpose of investment, you must keep in mind that the valuation of your property will not raise overnight. In any area, where several houses have been attached, the property rates fall in general. Regaining the previous levels takes its own time that could be medium to long term.
- Research. Internet has made it really easy to search through huge piles of listings in your locality. There are a number of websites that allow listings based on geography. Such information is also available through local newspapers and magazines, but on a much limited scale. If you are considering property brokers, understand that they try to push the prices higher to obtain better margins for themselves. So, it would be a better choice to discuss with someone, who has purchased such property directly from a lending institution or its authorized representatives.
- Inspection. Once you are done with the previous steps, arrange for a personal inspection of the shortlisted properties. There is nothing like a firsthand experience – you may discover some flaws, may not be okay with the surroundings, or may even come across some positive points that earlier you didn’t know existed. This becomes even more critical if the prices offered on the property are too good to be real.
- Redemption clause. A very important point! If you really like some house at the inspection stage check all the paperwork. In some states, the local laws may provide for a redemption right to the first owner, i.e., the person whose property was foreclosed. Ensure that if there is any lien, it is only against the lender (who sells the forfeited home) and on the amount of auction & interest payments. It is advisable to do a title search to avoid the situation, where the original party comes back to reclaim the property. It is particularly true in the wake of the recent ‘rob-signing’ scandals. This may be the stage, where bringing in a professional is definitely a good idea.
- Expert help. There may be a lot of guidance available online or your friends and family may be there to help, but you will still need some expert advice. Apart from the Federal laws, there may be a host of state level rules and regulations that you need to comply with. The foreclosure sales expert can take care of all the formalities and paperwork. On the other side of the story, some institutional auctioneers may insist on representation by an expert.
- Participate in auctions. Apart from direct sales, foreclosed homes are sold at auctions also. Get all the information about the bidding procedure and determine how much you are willing pay. Rest of the steps remains the same.
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