Pros And Cons Of Buying Foreclosures

Learn what a foreclosure is and if buying foreclosed property can be a wise investment. Information on buying properties.

Buying foreclosed real estate can be quite risky, but it can have its rewards too. If all goes well, you can have a home that was purchased at possibly 25% less than its market value. That means you can put money into the property, and still be ahead. If you do not do your homework though, the property that you purchased can become a thorn in your side.

What is foreclosure?

When you borrow money from a bank to purchase a piece of property, you sign an agreement saying that you promise to pay that money back. The bank will set up a monthly payment schedule to repay the money borrowed. If you fail to keep your promise, the bank can begin foreclosing on your property. This means that eventually, the bank gets the property back. Once the bank takes back the property, it then goes for auction. The highest bidder gets the property.

One would assume that when a property is foreclosed on that it is now "free and clear" of all liens. That is not so. When the bank takes back the property, they do nothing to improve the property, and the property is sold "as is". That means if it is rental, the tenants may not be evicted and may have tenant's rights. That means if you want to evict them, you may need to pay the legal expenses in order to do so. Property taxes are another issue. If the homeowner has defaulted on their mortgage, most likely their real estate taxes are delinquent. Most banks require homeowners to escrow their real estate taxes, which a portion is incorporated in the mortgage payment, so if the monthly mortgage payments have not been kept up to date, chances are the taxes have not been either.

You will need to consider other creditors that may not have been paid for an outstanding debt and my have filed a lien against the property in order to hopefully, someday receive payment. Filing a lien on a piece of property is an assurance to the creditor for payment. If the homeowner ever sells the property, the lien will need to be paid in order to be sold "free and clear". A creditor may have missed the boat by not filing a lien against the property prior to the notice of foreclosure and will file it anyways. They may not have a legal right to their debt; however this may cause a "cloud" on the title.

Buying a foreclosed piece of property can be a very wise investment. In fact there are individuals and companies that make a very modest income by doing just that. So be prepared for the competition that awaits you. Before you make a bid on a piece of property, do some homework first. Go to your local county courthouse and do a quick title search. Check to see how many mortgages and/or liens may be filed against the property, as well as any docketed judgments against the owner(s); and check to see if the property taxes are current. With interest rates at record lows, buying a piece of property well below its market value, that appreciates annually, can be a sound investment; and knowing all the information that is available to you, can lead you down the path to homeownership with peace of mind.

© High Speed Ventures 2010