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What Are The Risks in Buying a Foreclosure
What Are The Risks in Buying a Foreclosure
So what is a foreclosure anyway? Foreclosure results when a homeowner misses successive payments to a mortgage lender (usually 3 months) and has no means to catch up with the accumulating debt. This is called distress and almost always leads to foreclosure. Once a lender starts the process it is very difficult to get out. Legal fees and late interest charges pile up quickly and the homeowner finds himself unable to pay off the debt triggering the repossession of the home. Once the home is repossessed by the lender it will be auctioned off or listed for sale on the MLS. In Canada there are various ways to buy a foreclosure.
Here we will explain the process used to buy these properties when listed on the MLS. First, the bank will offer no guarantee or warranty on the property. Everything is as-is. You should always do a home inspection to protect yourself from potential and costly defects. Second, the offer may need to be left open for acceptance for a significant time period. Sometimes this is as little as 24-72 hours. At other times 5 business days or more could be required. Third, it would be advisable to insert a financial condition into the offer in case an appraisal is needed. These are some main points in the purchase process and that you may already understand. However there are other important distinctions between buying a foreclosure and the standard real estate transaction.
Something people rarely consider to their detriment is the value of the guarantees in a standard real estate contract. In an ordinary real estate deal the seller's warranties can be extremely valuable. One of those warranties is that the home and other structures (i.e. garage, shed, deck) are located within the legal property boundaries. Banks will not guarantee this in Canadian real estate transactions when the home has been through the foreclosure process. To ensure compliance with a municipality the buyer will need to obtain a real property report and have the city building department verify the survey. Another standard warranty applies to hidden or latent defects. Since the lender does not have any familiarity with the property's condition (they have not lived in the home or probably ever been to the property other than having an appraisal done) they will deny any direct knowledge of the homes history in terms of mechanical or structural integrity.
This is a significant point. Let's assume the property floods every few years because of a high water table and a small foundation crack. Maybe it hasn't been very rainy where you live in the past couple years so the home looks bone dry upon inspection. This defect can be difficult to detect especially if the basement is unfinished. So you buy the home and develop the basement. Then a spring of heavy rain ensues and your basement is full of water. What does that cost? A lot. Normally you could pursue legal avenues to get some compensation. Not so when you have bought from the bank. Recall the phrase, buyer beware? Well the reality of the situation hits like a ton of bricks. You pay somewhere in the neighborhood of 20k to 30k to have the basement redone and foundation repaired (if you're lucky). So now you have added a significant cost to your original purchase price. What is that warranty worth now? It's worth whatever you paid to fix the defect. Now this doesn't happen all the time, in fact, this scenario is pretty rare. However, if it could happen, you should act like it will happen when you make your offer to purchase. In general I tell my clients that the warranties and guaranties in the standard real estate purchase contract are worth a 10% discount on market value. While others may wish to play property roulette I do not condone it. I have seen people lose money and be under water (both literal and figurative) when they don't consider the negative consequences of a "great deal"
Of course there are many other scenarios we could examine but I think they are unnecessary. Just remember this, when buying a foreclosure assume there is something wrong with the property and act accordingly. Protecting yourself and your investment should be the primary concern. Do your due diligence with an inspection an appraisal but also allow for defects when deciding on your offer price. If your offer is accepted at the bargain basement price and you find no significant defects over time you have made wise and profitable investment. On the other hand if you find defects after the purchase you have already worked that cost into the price. Foreclosures can be great deals if you do it right so make sure you are positioned to profit rather than ending up regretting your investment. How to Get Payday Loans Online With Bad Credit? Where To Buy Beauty Products Online In India Why Kids Should Play Outside Pearly Penile Papules Treatment Cost & How to Successfully Get Rid of PPP Buying Valuable Diamonds Motorcycle Insurance - Things To Know When Shopping For Motorcycle Insurance Quotes Watch American Idol - Season 10 Episode 12 ONLINE Debate Exposed - The Truth Behind the Mediterranean Diet plan How Long Will China Float The Global Economy? Choose Your Stylish Wedding Dresses Free Online Logo Service By Logochefs Helpful hints That will make A rewarding Connection with Investing in Watch Causes Folks Search For A Phoenix CPA