While there are sometimes bargains to be found in the purchase of foreclosures, there are also serious pitfalls. Foreclosures are not for the inexperienced. Use the following to help guide you through the process.
1. Don’t buy a foreclosure in the wrong area. Even if the home is a great deal, if you are planning to live there, you’ll probably regret your decision. Price is never the only factor. And even if you are an investor, if the home isn’t in the area you wanted, it may be better to look for another.
2. Don’t assume that a foreclosure is a great buy. Do your homework. Recruit a Realtor® to guide you.
3. Don’t get caught up in the excitement of a bidding war. Whether at auction or through negotiation, bidding wars frequently result in someone paying too much. Have a pre-determined maximum price and don’t go beyond it. If the bidding remains below your maximum, however, use the tactics in Winning a Bidding War.
4. Don’t buy a home without an inspection. Even if a lender is selling the home “as-is,” your offer to purchase should include an inspection clause with a time limit for your acceptance. With an inspection clause, you’ll be protected and not bound to close if you discover serious problems. Your clause should include an inspection for structure, pests, radon, mold, drainage, and anything else that may be appropriate for the home you’re considering.
5. Don’t buy a property without a title search and without purchasing “owners’ title.” Foreclosures may have problems that failed to be uncovered during the foreclosure process. Protect your investment by purchasing coverage.
6. Don’t expect any type of warranty. You’re buying the home “as is” and will be responsible for making repairs.
7. Don’t expect the bank to make allowances for your personal situation. Banks have been overwhelmed with foreclosures and have neither the time nor the inclination to make exceptions.
8. Don’t try to close a deal without an attorney. While you may be using a Realtor® and “trust” the seller, you need an attorney’s guidance to avoid the potential for certain risks and “super liens” that may survive the foreclosure.
9. Don’t attend a foreclosure auction unless you are totally prepared to buy. That means you must be ready to meet the financing requirements of the auction (usually cash or a letter of credit), that you have full knowledge of the property and the costs of making repairs, and that you are fully ready to purchase. Auctions are attended by professionals (often referred to as vultures”) who both know the true value of the property and the cost of repairs. But they are sometimes attended by cash-rich novices who bid up the price far beyond a home’s reasonable value.
10. Don’t consider a foreclosure until you check out the limitations and requirements in your particular state or area. There are considerable differences between states, and just because you’ve heard of great opportunities in one doesn’t mean the same exists in another.
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