Can You Justify the Purchase of a Foreclosure?

Can You Justify the Purchase of a Foreclosure?

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New home shoppers these days are being enticed by homes that are priced much lower than they were two, three and even five years ago or longer. The housing bubble has burst with some markets still likely to see an additional price drop before everything settles within the next two years or so the pundits say.

In any case, some homebuyers are considering getting in on the housing market the new-fangled way: by purchasing a foreclosed home at prices below the going rate, fixing it up and enjoying a bargain for many years to come. Inasmuch as the market does offer some excellent deals, buying a foreclosed home isn’t always the bargain you may think that it will be. What it can present to you is the worst home improvement project you can imagine as mold, unleveled floors, insufficient wiring and a host of other issues might be present.

Let’s take a look at whether you can truly justify the purchase of a foreclosure:

Pricing — With home prices in some markets continuing to tumble, the price of the foreclosed home you’re considering may not be the bargain you think that it is. Obtain neighborhood comps and review prices for similar homes on the market today. If the difference is less than 5 percent, you’re not getting a bargain. Under 10 percent and your foreclosure may make sense, depending whether repairs are needed.

Repairs — Even if you are contractor, bring in another set of eyes to evaluate the property with you. You may miss a structural issue, one that could cost you dearly later on. Better to have everything known and on the table ahead of time, giving you the information you need to evaluate the property objectively.

Financing — Not every bank or mortgage company is keen on funding a foreclosed home, regardless of how good your credit is. You may be able to obtain a loan, but you could find that the rate offered is higher than what you would pay to finance a home that wasn’t bank owned. That will certainly be the case if you must finance your repairs.

Neighborhood — What is the state of the neighborhood where you want to buy? If the neighborhood is stable, then you may have found a pearl, especially if the home is in good condition. If the neighborhood is in decline, you may find yourself the owner of a home that is still losing value even after a major makeover. Understand your neighborhood and the trends inherent — speak with the police department to find out if crime is a problem and whether it is on the rise.

Taxes — Who doesn’t want to save on property taxes? If you live in a high property tax state like New Jersey, you know that four-figure taxes are common throughout much of the northern part of the Garden State. Will your tax assessor agree to reduce your taxes while work is being done? Is your home still overvalued? In any event, you’ll have to pay taxes, utilities and handle other expenses while your home is being repaired. Six months may be a long time to have the cost of a home you can’t live in over your head, quickly eating up the savings your “bargain” foreclosure once promised.

In your mind you may be able to justify the purchase of a foreclosure, but your wallet may tell you otherwise. Budget the price of anticipated home repairs and, if possible, use the cost of these repairs as leverage with the bank when it comes time to bid on the property.

Resources

SayLending: A Mortgages

MSN Money; Should You Buy a Foreclosure?; Sally Heristag; March 19, 2009

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About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Auto Trends Magazine", an online publication. Matt covers campus, consumer, business and financial topics on various websites and weblogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".