Advantages & Disadvantages Of Buying A Foreclosure - house with foreclosure signOnce upon a time it was possible for buyers to identify a bank foreclosure from a mile off. They were often run-down, stripped-to-the-bone and abandoned buildings which looked completely uninhabitable. However it’s a different ball game today, as many banks now choose to renovate their real estate owned (REO) properties before listing them on the market for end users to purchase. This prevents investors and contractors from making a lucrative profit through the bank’s loss.

Related: Home-Buying for Beginners: 8 Red Flags When House-Hunting

Banks are clever these days, and they understand that the market has improved significantly in recent years, so they won’t come across as desperate anymore. Instead of trying to sell as quickly as possible, they look to minimize their losses. This ultimately creates both rewards and risks for home buyers looking to purchase a foreclosed home. In order to make a clever decision, it is critical that you weigh the advantages and disadvantages of buying a foreclosed home. Here are the pros and cons of purchasing a foreclosed home so you are fully prepared and equipped with all the knowledge you need.

Advantage when Buying a Foreclosure:

They are incredibly cheap compared to ordinary properties.

Buying A Foreclosure at Reduced PriceBank-foreclosed homes are still cheap to buy in the market and cost roughly around 5% below their true value. In other words, you could buy a similar house in the same location which isn’t a foreclosure for 5% extra. This is quite an impressive saving you are making, considering the property won’t be in bad shape after having been renovated by the banks. In previous years the market often had foreclosures at roughly 15% below their true value; however, they were in a terrible condition, as the banks simply sold them to get some money back. This suited investors and contractors who could easily make a profit by spending a little on renovations then selling the property.

Related: How Long does it Take to Close on a House

Disadvantage: There is a lot of risk involved.

Foreclosed homes have had money invested in them by the banks to drive prices up. This in turn means the banks won’t be too flexible on negotiations and won’t care as much about making a quick sale. They know it’s only a matter of time before a buyer comes around willing to pay the listed price, so they don’t need to negotiate. There are plenty of other risks involved. For example, you don’t know everything about the history of the home and there could be mold, fire damage, ragged roofs, or even criminal activity, which is a massive risk considering there is no disclosure. You will be forced to purchase the home as it is with absolutely no recourse if anything goes “upside down.” In previous markets, the profit margin was large enough for investors to still make a healthy profit after repairs. However, now there are no bargains motivating them to put in the effort.

Disadvantage when Buying a Foreclosure: Banks can be ruthless and show no emotions.

RuthlessYou aren’t negotiating with someone who might take interest in your situation. You are negotiating with a bank that does not care about your history or background. It’s all about the money for them, and your offer will usually be placed into a spreadsheet and not in the mind of a caring human being.

It is crucial to remember that banks want the most out of their properties. Sellers nonetheless, they take great care in studying the market and know what they are doing. They aren’t as careless as they once were and they will not sell to someone who wants to negotiate while someone else is willing to pay top dollar for the property. You also need to be prepared for any risks behind the scenes. Be ready for unwanted repairs such as mold, which is definitely a possibility in a foreclosure. Take good care and look deeply into a property with your estate agent before making any decisions.

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