it is better to buy a home before it goes into foreclosure?
Like almost any mortgage or real estate question these days, the answer is, "It depends." It is usually easier to not deal with a bank or lender on a real estate transaction. There is little room for negotiation and needed repairs are generally not tended to by the owner/lender. That said, if the property is worth less than the sale price, the lender will become involved anyway as this would become a 'short sale' transaction. The payoff will be less without legal costs that are added in a foreclosure. So, in general terms, if you can buy it beforehand, you and the property will be better off. You might pay a little more in some cases, but if the condition of the property does not deteriorate from neglect ,as most foreclosures do, your investment will be better protected.
It will vary from state to state, too. In Vermont, for example, a homeowner has a redemption period. So, even after foreclosure awards the property to the lender via the court system, the homeowner can STILL sell the house and pay off the amount owed until the redemption period expires. If a homeowner has equity in a property, there is motivation to sell quickly to save some of that equity before it gets eaten up in court costs, too, so this is another reason to look at a home before rather than after foreclosure.
Based upon the information that I have been hearing from attorneys and buyers my answer would be yes, it is better to buy a home before it goes into foreclosure. Here are some of the reasons for this:
1. First it will be quicker. The foreclosure process is time consuming and there could be a substantial time lapse before the lender actually places the property on the market for sale.
2. On the part of the seller (borrower) of a pre-foreclosure property it would be less costly for them in terms of their credit and money to sell before they are foreclosed upon. What I mean by this is if the lender forecloses on the property this event will be a major blemish on the borrowers credit score and an incident that will remain on the credit report for a number of years. It will also take, in general, four years before the foreclosed upon borrower will be eligible for another mortgage. If the lender takes back the property and sells it for more than what is owed, including all interest and late fees, attorney fees associated with the foreclosure, realty commissions, etc. the balance goes back to the foreclosed upon borrower. If the borrower can sell the property in advance of foreclosure it will be far more beneficial to their overall credit and bottom line in terms of dollars.
3. Most banks that hold foreclosed properties are rather ridgid in terms of accepting offers to purchase and the terms included in an offer to purchase. They generally want the process to go as quickly as possible and a buyer may be restricted in the type of loan they wish to use for purchase if the lender preceives the loan as being too time consuming to process.
4. Many lenders selling foreclosed properties are rather ridgid in terms of any title issues with these properties. Attorneys have told me that if a cloud in title should appear the lender holding the property will not do anything to help clear it up. In other words the buyer will have to purchase the property just the way it is and deal with all of that themselves. If you engage the services of an attorney when purchasing a foreclosed property most will advise not to proceed should problems with title arise. At this point a buyer may have expended funds for inspections, etc that will be non refundable.
5. I am told that many lenders selling foreclosed properties will require the buyer to pay some of the costs normally paid by the seller. In New York, for instance I have heard lenders require buyers of their foreclosed properties to pay the "sellers" transfer tax. This is an additional expense to a buyer not incured in a regular purchase.
6. If there are any problems with the house itself, lenders selling these foreclosed properties will generally not fix anything, nor renegotiate on the purchase price if inspections are done after an offer has been accepted (which is usually the case).
All in all, although I have not had the experience first hand, I would say that if one has an opportunity to purchase a property prior to foreclosure it is something worth pursuing.