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8 Costly Bank-Owned Mistakes To Avoid Understanding some of the costliest mistakes to avoid goes a long way in finding a great foreclosed bargain in today's market. Here are seven common mistakes to be aware of:
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Mistake 1. All foreclosed homes are bargains.
Understand that the institution selling the property (lender, government agency, etc.) wants to clear its inventory. The home's condition is not their concern. Be prepared to do your homework -- and rely on a professional real estate specialist (like us!) -- to avoid any land mines.
Mistake 2. Overbidding.
Foreclosed-home buyers must know area home values, condition of nearby properties, neighborhood trends, street noise, airplane traffic, zoning and other issues that affect the property's value. Sometimes bank-owned REO properties are priced below market value to attract multiple bids and drive up the sales price. We'll help you bid right.
Mistake 3. No inspection necessary.
Some buyers of foreclosed homes think a professional home inspection is too expensive -- that's a costly mistake. Lenders and others who sell a property "as is" may not be obligated to repair problems and defects.
Only a licensed home inspector can identify problems from electrical wiring or plumbing to radon or pest infestation to serious structural or system problems. If you don't have inspections conducted on a property prior to making a purchase offer, you'll want to include an inspection contingency in your contract. That contingency allows you to terminate the contract if inspections reveal problems the seller won't fix and you don't want to handle yourself.
Also, be sure to do a final walk-through inspection just before closing/settlement to ensure the condition of the property has not changed for the worse and that any agreed-upon improvements by the seller have been made to specifications.
Mistake 4. No clear title.
Most sellers of foreclosed properties will deliver a General Warranty Deed for the property, which guarantees that the seller holds clear title to the property and has the right to sell it to you. Be sure to add a clear-title contingency to your contract with the seller, just to make sure.
Having a professional title search conducted before closing/settlement is critical to ensure you won't be surprised by hidden ownership claims or liens. (A lien is a legal claim against a home for such things as unpaid property or income taxes, unpaid contractors or loans borrowed against the property. Liens can stay intact until the money is paid, which means you may have to pay off any outstanding liens as the new owner if the institutional seller has not already done so.) Without a clear title, you may not be able to get owner's title insurance to protect you against future unforeseen claims.
Mistake 5. Not buying owner's title insurance.
Your lender will require you to purchase a title insurance policy to protect the lender's investment against unexpected liens and claims. As the buyer, you can also purchase an owner's title policy to protect your own investment -- highly recommended when purchasing a property that has gone through foreclosure. According to the American Land Title Association (ALTA), a third of properties on which title investigations are conducted show some problem with the title that must be corrected before the sale is finalized.
Although buying your own policy could add hundreds (in some cases thousands) to your closing costs, the one-time cost of the policy provides protection, for as long as you own the property, against claims on the home that could arise after you become the owner. Consider buying upgraded owner's insurance (an ALTA-R policy) to protect against last-minute or unrecorded liens. You may be able to save a few hundred dollars on your policy by shopping around for the best price.
Mistake 6. Not enough cash.
Be prepared to pay for closing costs and fees or any repairs and unforeseen expenses, especially if you're buying an "as is" property with FHA financing that may require buyer-paid repairs to pass FHA inspection. A foreclosed home may not be a bargain if you can't afford to make it livable.
Mistake 7. Not enough patience.
To buy smart in the foreclosed-home market, you must do your research, learn about other higher or lower bids (if possible), property taxes, utility bills, liens, and so on. Take time for due diligence.
Mistake 7. Not asking enough questions.
Ask for copies of all relevant permits, repair receipts, surveys and inspection reports (if any). Inquire about past-due condominium assessments or homeowners association dues that might create a lien. Be clear about any brokerage commission to be paid and who pays it (seller or buyer). Then follow up with calls, on-site visits and more research.
Remember, we have vast resources of information to help, and we'll guide your foreclosed-home purchase to closing/settlement.