Buying a foreclosed property: everything you need to know
Last modified: 2021/09/16 | Approximate reading time 4 mins
Imagine that you are actively looking for your next home. After several visits, you finally come across a property that you like and that meets all your needs. However, you learn that it's a foreclosed property.
How do you feel? Do you continue with the acquisition process or do you back out and look for another opportunity?
It cannot be repeated often enough: acquiring a property requires a significant investment that you must always take the time to evaluate. In the context of financial repossession, several factors must be considered at all costs to ensure that you make the right choice.
What is a property foreclosure?
The term "property foreclosure" is used to refer to properties that have been seized by financial institutions for reasons of non-payment. Once foreclosed, these properties are sold on the real estate market to recover the money owed by the former owner.
In cases of non-payment of the mortgage, the creditors first contact the borrower in an attempt to resolve the problem. Although courtesy calls are usually sufficient to correct the situation, sometimes the bank is forced to go a step further.
Several solutions may be put on the table by the financial institution before seizing the property. The process can even be spread out over more than a year to give the borrower every possible chance. If none of the actions work, a legal process can be undertaken by the lender to regain ownership of the property and put it up for sale.
Foreclosed properties: invest or abstain?
The major argument for buying a foreclosed property has long been the attractive price. The potential buyer could save a lot of money by buying this type of property, because the banks, seeing that the house was in bad condition or on the market for too long, lowered the selling price.
However, this situation is no longer entirely true today. With the real estate market largely benefiting sellers more than buyers (demand being greater than supply), most homes do not stay on the market very long.
Financial institutions do not have to lower their prices as much as they used to. Some finance repossessions sell without the bank's price suggesting a « fire sale ».
The selling price is still influenced by the condition of the property. Obviously, a home that needs work will see its price drop in an attempt to attract potential buyers.
But despite the lower purchase price for the future owner, one must not forget that an additional budget must be established for the necessary renovations. What seemed to be a bargain at first glance may turn out to be much more expensive than expected!
To ensure an informed choice, surround yourself with professionals who will explain to you all the potential risks involved.
The absence of legal guarantee for foreclosed properties
The legal warranty, also known as the "legal warranty of quality", usually protects the buyer of a property in case of hidden defects. Depending on the situation, it allows the buyer to obtain:
- A reduction in the price of the property;
- Compensation for damages incurred;
- Reimbursement for renovations made (or those that will be necessary) to repair the hidden defect;
- Rescission of the sale, allowing the buyer to return the property to the seller and be reimbursed for the price paid.
However, most finance repossessions are sold without a legal warranty, which represents an additional risk for the buyer. The buyer acquires the property at his or her own risk, thereby waiving the possibility of recourse against the seller in case of hidden defects.
Note, however, that the seller, i.e. the financial institution, is still obliged to disclose any problems it is aware of with the property. However, since the seller has not directly lived in the building, its knowledge of the defects will be limited.
In the event a problem arises, the buyer is fully responsible for paying for the cost of repairs. Depending on the extent of the damage to be repaired, this can be a costly contingency.
The real estate broker must inform you that the property in question does not have a legal warranty, of the possible consequences of this situation and of your future rights if a defect appears. The broker also has a duty to recommend that you have a pre-purchase inspection.
The importance of the pre-purchase inspection
The pre-purchase inspection is one of the essential steps in any real estate purchase process. It is even more important in the case of a foreclosed property, to try to uncover as many potential problems as possible.
Considering that the previous owner could not afford to make his mortgage payments, it is very likely that he did not invest much money in renovations and maintenance of the property. Whether or not there are hidden defects, there may be a lot of work that needs to be done.
Calling in a home inspector will give you a clear picture of the condition of the property before you close.
Financial repossessions: for what type of buyer?
Because they come with their own set of financial risks and may require a lot of maintenance, it is no surprise that many buyers will try to avoid repossessions.
This type of property is, therefore, more specifically suited to seasoned buyers. Owning a foreclosure means being prepared to put more time and money into renovating the building.
Some investors may also be interested in these properties. Buying below market value and investing to renovate them to current standards, they can resell ( with a legal guarantee) at a higher price. This can be a good way to make a profit provided there are no unpleasant surprises.
Not risk-averse and ready to invest in a financial repossession? No matter what type of buyer you are, be sure you have considered all of the potential pitfalls before jumping in.
Looking for a real estate broker to guide you through the purchase of a financial repossession?
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