Pros and Cons of Buying a Foreclosed Home
You’ve probably encountered the term foreclosure at some point while browsing for your new Calgary home. Seeing a listing like this may seem tempting but also a bit confusing. What makes it so is that foreclosed homes often sell a bit below their market value. It seems such a good opportunity to purchase your dream home! However, you probably wonder what a foreclosure is and how buying a foreclosure is different from other home purchases. In this article, we provide a simple yet valuable guide about buying a foreclosed home. As with any real estate purchase, there are some great benefits and some risks to consider.
What exactly is a foreclosed home?
First things first, let’s answer this critical question. Foreclosure is a legal process when a bank or mortgage lender repossesses a home. This usually happens when a homeowner cannot pay their mortgage regularly (for at least several months). Then the lender sells off the property to cover the balance.
However, there are several risks and potential obstacles along the way. These will differ depending on the type of foreclosure as well as on the current market situation. There are two types of foreclosure – judicial foreclosure and power of sale foreclosure. Here is what you can expect from each of them.
A judicial sale is a type of foreclosure in which the lender (usually the bank) sells the mortgaged property under court supervision. This means that in order to sell the property, the lender requires the court’s permission. Naturally, the borrower (homeowner) represents their case in court. They have to respond to a ‘Statement of Claim for Debt and Possession’. But, if they fail to do so or lose their case in another manner, the lender can sell the property and gain back the money they’re owed.
What does this mean for you as a potential buyer? Well, the court process can take a lot of time and money. The legal proceeding can take from several months to a year. So, if you have an eye on such a home, prepare yourself to be flexible and patient.
Power of sale
This type of foreclosure is far more common, and it requires no court’s permission. Instead, it usually happens due to the power of sale clause in the homeowner’s mortgage contract. If the homeowner misses four consecutive mortgage payments, the lender will start the foreclosure process. However, the homeowner usually has a 35 days redemption period to catch up with the payments. If they fail to do so, the lender sends them the eviction note and can sell the home.
What does this mean for you as a potential buyer? Well, the process is faster than in judicial foreclosure. But the lender will try to achieve the highest price in order to cover the balance on the remaining unpaid mortgage.
Advantages of buying a foreclosed home
Although foreclosed homes don’t pop up for sale in Canada as often as they do in the US, it still happens. And it happens for a variety of reasons. However, every type of foreclosure is a somewhat lengthy and complicated procedure.
For that reason, lenders usually try to avoid it and help the homeowner get back on track with regular mortgage payments. But in some cases, it simply isn’t possible. When that happens, the lender wants to recover from the loss by selling the home fast. As a result, there are some advantages for potential buyers of a foreclosed home:
- the lender wants to sell quickly, so the price might be below the market value (not the rock bottom price, though) – a foreclosed home can be sold traditionally via a real estate agent or on an auction (in which case the price can be even lower)
- there will be no liens, backdated taxes, or outstanding mortgage payments – solving all of these issues is the responsibility of the lender
- you can use the money you save on the purchase to perform necessary repairs (if there are any) and home improvements – that way, you can increase your home equity as well as the value of the home
- if you’re looking for an attractive foreclosure listing to use as a rental property, it can be a good investment
Risks of buying a foreclosed home
On the other hand, with every opportunity, there are some risks. The best you can do is to be aware of them and have a clear picture. Knowing what you want and expect of the property in question is crucial.
According to moving experts, Centennial Moving, you should consider your budget, your plans with the property (move in, rent it, fix and sell it), documents and procedures involved, etc. Additionally, hiring an expert realtor and lawyer will help you navigate the whole process with ease. Here are the disadvantages of buying a foreclosed home you should discuss with them:
- the price is only slightly lower
- a complicated legal and financial procedure
- the home is usually sold ‘as-is’ – which means that after the purchase, you’re all on your own when it comes to repairs and potential issues
- the lender has no liability and offers no warranties
- limited inspection – you might not be able to thoroughly inspect the home before purchase
Don’t forget to plan for the relocation expenses
Whether you decide to buy a foreclosed home or choose the more common route, don’t neglect to consider moving expenses. Relocation is often a stressful task, so finding reliable and experienced movers in advance is crucial. This is especially true if your new home is in another city or you’re moving from one province to another. With a good plan and the right movers, relocation to a totally new province will be simple and stress-free.
How to find a good deal?
As you can see, buying a foreclosed home has many advantages but also poses certain risks. It’s a complicated process that requires time and experience. If you want to make the most of the purchase, it’s vital to have experts at your side. A trustworthy real estate agent, a mortgage lender, and a lawyer will provide you with valuable information and advice. With their help, you’ll be able to avoid all the pitfalls and legal hurdles and buy a home you’ve always wanted.
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