If you’re in the market for a new home, you may be considering a foreclosure or short-sale property. Often sold below market value, the sale price on these homes may make this option seem attractive. However, those savings may come with additional expenses and hassles that you didn’t bargain for.
Learn what you need to know about foreclosures and short sales to decide if it is right move for you.
How are foreclosures and short sales different?
If homeowners can no longer afford to make mortgage payments, they have a few options—two of which are short sale and foreclosure.
In a short sale, homeowners work with their mortgage lenders to sell a home for a price that’s lower than what they owe. The lender takes the money from the short sale and will often forgive the remaining balance. For example, if the current homeowner has a $200,000 mortgage but the market value of the home is now $180,000, the lender may forgive the $20,000 difference if the home sells at the current market value. The mortgage lender that holds a lien, or has a right to possess the property, has to agree to the sale. This is often the action homeowners take before resorting to foreclosure.
If homeowners miss many mortgage payments, the lender may foreclose on their home. As a result, the lender may take the property after providing them with a foreclosure notice. With South Dakota foreclosures, the Sheriff will publicly auction the property. The bank can buy the property back at this time, too. This process is often the case in both non-judicial foreclosures, meaning no court action was required, and judicial foreclosures, meaning the lender went to court to get the final foreclosure.
What are the upsides of buying a foreclosure or short sale?
The number one reason people buy short-sale and foreclosure properties is the low price. However, you have to know the ins and outs of short-sale or foreclosure processes to get the best deal.
In South Dakota, it’s best to find foreclosures and start negotiating on a selling price with the homeowner directly in the pre-foreclosure phase, according to foreclosure.com. It’s best to talk with a real estate lawyer or real estate agent who specializes in foreclosures if you’re going to go this route. Established real estate agents may be able to give you good pre-foreclosure leads, too. You will also be able to find future foreclosure auctions in South Dakota online.
If you’re looking for short-sale properties, you’ll find them listed alongside traditional properties on local listing sites and publications. You may not see any properties listed as short sale, as some don’t advertise this. However, there are cues you can pick up on to find them. If the seller’s bank or lender needs to sign off on the sale, that will likely be your biggest clue.
What are the downsides of buying a foreclosure or short sale?
The number one downside of buying a foreclosure or short-sale property is the amount of work it can take. The following are common hurdles you may run into.
If you purchase a house at a public auction, you may not see the home, in person, ahead of time. If the previous homeowner could not make mortgage payments, he or she may have neglected regular home maintenance as well, and property renovations can get expensive. For foreclosures and short sales, you’ll want to get a professional home inspection if possible. This will reduce your chances of finding unwelcome surprises in the home down the road.
Buying a foreclosure or short-sale home can be a drawn-out process. In addition to the time it takes to make home repairs before moving in, you’ll likely go through longer negotiation or waiting periods.
In a short sale, once you make an offer on the house, both the homeowner and his or her lender will need to approve the offer and terms of the sale. If the lender rejects your initial offer, then you can come back with another one. Negotiations can take weeks or months.
In South Dakota foreclosures, the lender typically needs to give the homeowner 21 days notice of the foreclosure. The homeowner also has a right to reinstate with judicial foreclosures—pay missed mortgage payments plus fees—before it enters court or is auctioned off. Mortgage contracts may also allow for reinstatement in non-judicial foreclosures. In addition, there is a redemption period, which can last up to a year. This allows the homeowner to buy the house back. If you’re in the market to buy a foreclosed home, these stipulations can leave you with uncertain timelines.
In addition to repair costs and drawn-out timelines, there may be additional costs in the form of consultation fees (if you work with a real estate attorney) and hidden costs attached to the title of a home. If the previous owner didn’t pay old debts, such as tax liens or encumbrances, you may be responsible. Uncover any debts associated with a property before buying. You can often look up this information in public records.
Education is your key to success.
Before you buy a home, make sure it is what you really want. Make a list of features that are non-negotiable. You’ll likely be in your new home for a while (unless you’re fixing it up and reselling it). You may also wish to look at homes outside of foreclosures to find a good deal, too.
Also note that each state’s foreclosure and short-sale processes and laws may vary. For example, in North Dakota non-judicial foreclosure is not available. It’s always best to work with a real estate agent and lawyer who has substantial experience in this area. Buying a short-sale or foreclosure property can be a complicated process. Do your best to educate yourself about all potential roadblocks so you can enjoy your new home to the fullest for years to come.