Considerations before Buying a Home in Foreclosure
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Before You Buy a Home in Foreclosure.

While millions of Americans struggle to make mortgage payments and worry about losing their homes to foreclosure, many others are looking to buy homes for the first (or second, or third) time. Naturally, these two sides of the real estate market have converged in the public consciousness, and the idea of "buying foreclosure properties" seems to be cropping up everywhere.

But before you jump on the foreclosure-buying bandwagon, make sure you know what you're getting yourself into. Consider this cautionary tale.

The Foreclosure Property that Disappeared Their Stuff

A recent article in Motley Fool tells the story of a couple who decided to buy a home. They ended up purchasing a house whose previous owners were in the middle of foreclosure proceedings. Though their purchase of the home should have brought an end to any foreclosure actions, they returned home from work one day to find all their possessions (including food) gone and their locks drilled through - in the home they'd just bought!

Turns out, JPMorgan Chase, the bank that owned their mortgage company, was so swamped by foreclosure paperwork, things got mixed up and the foreclosure proceedings on the couple's house weren't halted as they should have been.

Now, the couple is working with lawyers to determine appropriate compensation - but all their stuff is effectively gone: the contractor hired to remove it from the house donated it to secondhand stores in the area.

Why Foreclosure-Buying is Big Right Now

If you're considering buying a home, you've likely heard about buying foreclosure properties or buying properties from real estate "short sales." Part of the reason for that is that record numbers of houses are going into foreclosure right now, as the effects of the subprime lending boom begin to show themselves.

For real estate-savvy buyers, foreclosure properties or homes bought at short sales can be bargains - that is, buyers may be able to get them for less than their market value. But in some cases (such as the one described above), the purchase of foreclosure properties can be disastrous.

  • Foreclosure Properties: These are properties that the bank foreclosed on. In most cases, the previous owners were unable to make mortgage payments and the bank repossessed the house. The bank is now selling the house.
  • Short Sales: These are properties that have not yet gone into foreclosure, but are on the way. Rather than allow the bank to repossess the house, the owners are selling it for less than its market value. This lets the homeowners avoid having a foreclosure blemish their credit ratings and lets the bank avoid the hassles and costs involved in foreclosures.

Both types have the potential to be sold at a price below their market values. But, as the story above shows, even a "good investment" can turn into a major net loss if you don't have all your ducks in a row (and make sure the mortgage company does, too).

Dangers of Buying Foreclosure Properties

Buying a home is a complex process. Buying a foreclosure property is even more complex, since you need to have an idea of what kind of value you're getting, whether or not you'll owe money in addition to the price you bid, what condition the house is in and more.

The government's department of Housing and Urban Development (HUD) offers a list of guidelines for homebuyers. No matter what kind of house you're shopping for, be sure to follow these steps.

  • Figure out what you can afford: Consider your income, your credit rating, the interest rate you're likely to get, etc.
  • Learn your rights: To make sure you're not cheated or swindled, learn about the protections available to you. A good starting point is our Primer on Consumer Rights.
  • Shop for a loan: Again, you'll have to do a little research to determine where you can get the best rate. Start with this helpful page about saving money on home loans.
  • Research the home buying process: Congratulations. You've already started this step by reading this page. But don't stop here - talk to friends who have recently bought homes, visit your local library and find out if your area offers any classes for homebuyers.
  • Shop for a home: This is the part you probably think of when you hear "buying a house." Determine what features you want, what area you want, which real estate agent you'll work with, etc.
  • Make an offer: This is something you'll want to talk about with your real estate agent - you may have to negotiate and compromise with the seller.
  • Get a home inspection: Be sure to make a conditional offer that depends on the results of this home inspection. Getting the home checked out can save you time and money!
  • Shop for homeowners' insurance: Compare offers to get the best deal.

Bottom Line: Don't Act in Haste

Don't rely on one person or one resource when making a purchase as significant as a house. Explore many reliable sources, learn as much as you can and take your time before making major decisions.

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