Buying property at a foreclosure auction can be a great way to save money on real estate. Data shows that on average, foreclosed properties tend to be 28% cheaper than regularly listed properties. Correlating with this, these properties are sought after by individual buyers (as they can build up substantial equity over time) as well as investors (as they can rehab them and flip them for a profit in no time).
At the same time, there are several risks involved with buying foreclosed properties as well. So, it is extremely important to do your due diligence before buying a foreclosed property. In this post, let us take a look at the key factors you need to consider before purchasing real property at a foreclosure auction.
Foreclosed Properties Are Sold As-Is
A foreclosed property is not the same as a move-in-ready property. These properties are generally sold on an as-is basis, which means you will probably have to spend some money on repairs. If the property in question only needs minor repairs, it might be definitely worth investing in. On the other hand, if it is in need of extensive repairs, you might have to spend a substantial amount of money on top of what you pay for the property.
Moreover, if the property in question has major defects (damaged roof, serious plumbing or electrical problems, termite infestation, or structural or foundational defects) it might not meet what are called minimum property requirements (MPR), which can make it harder for you to get approved for financing.
In most cases, you might be allowed to do a home inspection after your offer is accepted. So, perform an inspection, find out what is wrong with the property, and determine how much money you might have to spend on repairs.
As a rule of thumb, if the cost of repairs and renovation exceeds 20% of the property’s value, it might not be worth investing in – unless you are really impressed with the property and want to live in it or if you are confident that you might be able to fix it and flip it for a substantial profit.
Most foreclosure auctions in Alabama tend to have a review period of 7 days, during which you can inspect the property and decide whether you really want to buy it. If you decide not to buy it, you can get a refund, as long as you do it within the review period.
The Risk of Liens
It’s fundamental to understand that a foreclosure does not wipe away all the liens on the property in question. If there are any outstanding liens, back taxes, or unpaid fees, you will have to pay them before receiving a clean title to the property.
These kinds of financial obligations can substantially increase your investment in the property. It is a key factor you need to consider, especially if you are planning to fix and flip the property. This is why it is critical to perform a title search before buying a foreclosed property.
Foreclosed properties are generally in demand due to the fact that they are priced considerably below the market value. Apart from individual buyers, you might also have to compete with real estate investors who tend to have substantial cash reserves at their disposal. So, to stand out from the rest, you should be willing to make a sizable deposit and show the pre-approval letter and the proof of funds letter.
Is It Worth It to Buy a Foreclosed Property in Alabama?
Buying a foreclosed property can be a good idea if the total cost of your investment (purchase price + cost of repairs) is less than the property’s market value. However, if the property in question is located in a nice neighborhood and if you want to live in it, you need not be too concerned with the immediate return on investment, as you might not have to sell it in the near future.
Before buying a foreclosed property, it is important to consult with an experienced Alabama residential real estate attorney. It’s particularly critical if you have never bought a foreclosed property at an auction before.
Looking to Buy Foreclosed Property in Alabama? Our Real Estate Attorneys Can Help You!
If you are looking to buy a foreclosed property and you are not sure how to go about it, the experienced Alabama real estate attorneys at Davis, Bingham, Hudson & Bucker, P.C. can help you. With over 40 years of experience, a first-rate legal team, and nationwide connections, our firm is best suited to guide you through residential as well as commercial real estate transactions.
Our attorneys are known for their extensive knowledge of state laws and their personalized, results-driven approach towards each and every case they take up. To talk to one of our Alabama real estate lawyers, call us today at 334-821-1908 or contact us online and schedule a free and confidential consultation.