Buying a property at a foreclosure sale (a.k.a. trustee sale) can be a great opportunity to acquire a property under market value, but there are risks that accompany any potential for reward.
The Risks:- In almost all cases, you will not have the opportunity to see the interior of the property before the sale. This is a tremendous risk, as the interior condition could greatly affect the value of the property.
- Related to the above risk, you will not have the opportunity to have a home inspection, well inspection, septic inspection, termite inspection, etc. You will be buying the property "as is, where is."
- A very quick closing (often 15 days) is required by almost all Trustees. This is a tight time frame, which must be adhered to.
- A deposit is typically due at the time of sale of anywhere from $10,000 to $30,000. This must be in cash or certified check, and can prohibit some potential buyers from participating in a foreclosure sale.
The Rewards:- Sometimes banks are willing to take some money, any money, just to sell a property. Earlier this month (January 2008), a property with an outstanding loan balance of roughly $200,000 could have been purchased for $127,000. The bank's bid was $126,000. Even if the property is not currently worth a full $200,000, there was likely a profit margin in this sale.
- There is often less competition (amongst potential buyers) at a foreclosure sale. The information about these sales are not promoted very heavily, and many buyers do not know about the availability of such properties. With fewer buyers on the scene, the sales price will likely not be as high.
- If the mortgage that is being foreclosed upon is not a recent mortgage, the owner will have likely paid down the balance of the loan, and the property will have appreciated. This means that what the bank needs to recoup from the Trustee Sale could be quite a bit lower than the market value of the property. Of note, most of the sales in the past few months have been on mortgages issued within the last 2-3 years. This has not provided for too much of a cushion to allow for a great deal.
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