Pros & Cons of Distressed Home Sales

Buying a distressed sale could be a great way to get a home below market value. But they are not for everyone.

Pros & Cons of Purchasing Distressed Homes

Is it worth your time and energy to buy a distressed home – a home through a short sale, foreclosure sale or real estate owned (REO) sale? Once you’ve done your homework and looked at the pros and cons, you’ll have a better idea.

Short sales

Short sales occur when homeowners try to sell their homes for less than what they owe the bank because their home’s value is lower than their mortgage balance.

As with all distressed homes, the sales price for short sales might be lower than your average home, but there’s risk and uncertainty. For example, before you sign a contract, the bank needs to first determine if the seller has a compelling enough financial hardship to qualify. An approval can take months and is not guaranteed, and you may not want to wait.

On the other hand, if you can let go of your emotional attachment to the home, aren’t in a hurry and are OK if the deal goes south, a short sale might work for you. In the meantime, keep looking at other homes in case the sale isn’t approved.

Foreclosure Sales

Another way to buy a home is through foreclosure. When homeowners don’t pay their mortgage payments for a certain period of time, the bank can begin the foreclosure process and eventually sell the property at a public auction. A major disadvantage for buyers is that no one is allowed inside the home before the sale. It’s sold "as is," meaning it could have serious damage, which would be the buyer’s responsibility.

Buyers also are required to bring a cashier’s check to the auction that’s equal to 10 percent of the home’s price. An auction might be great for an experienced investor with the know-how, money and patience, but not for your typical buyer.

Real estate owned (REO) sales

When no one buys a foreclosed home at auction, the bank hires a real estate agent and puts the property on the market as a real estate owned (REO) sale. Like foreclosures, REO homes are sold "as is." The bank will not disclose problems, pay for repairs, negotiate on price or be held responsible for damage to the home. However you are allowed to do your own walk throughs and inspections.

What you as a buyer can do in this situation before signing a contract is learn all that you can through inspections, neighbors and your city’s building/planning department. Ask neighbors if they have knowledge of the home and research whether the taxes and homeowners’ association dues have been paid and if building permits for past renovations were filed.

Also, make sure you work with an agent well versed in REO homes and have an inspection before signing a contract. That way, you know the property’s condition and whether you should sign the contract or walk away.

Know your limits

Getting the facts and working with a qualified agent will help you know whether to move forward. The more you know, the better you’ll be able to weigh the risks and decide if a distressed home sale is something you can live with.

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