Debunking common
misperceptions about this often overlooked market of real estate
Because the foreclosure
market has been relatively dormant in recent years, many people don't fully
understand how foreclosures work. This lack of understanding can foster
foreclosure myths that are dangerous both for homeowners who want to avoid
foreclosure and buyers interested in purchasing a foreclosure.
Here are seven of the
most common myths about foreclosures:
Myth 1: Foreclosures
only happen in poor areas. Foreclosures come
in all shapes and sizes and occur in all neighborhoods. From low-income to
million-dollar properties, you will see the full spectrum of homes entering into
the foreclosure process. Economic forces such as rising interest rates and
decreasing home values affect homeowners from all types of
neighborhoods.
Myth 2: Financial
irresponsibility causes most foreclosures. While there are
always those cases of financial neglect, most homeowners have shown some high
level of financial responsibility in order to qualify to purchase a property in
the first place. Unforeseen events such as job loss or a catastrophic accident
can cause sudden and unpredictable financial havoc for homeowners. In addition,
foreclosures also tend to increase when interest rates are up and property
values begin to decrease. When this occurs, homeowners may find themselves
paying higher monthly mortgage payments for a property that is no longer worth
what they originally bought it for.
Myth 3: All
foreclosures are in disrepair. While some
foreclosures can be in less than ideal shape, many are in great condition. The
myth that all foreclosures are in disrepair seems to be driven by the other myth
that foreclosures are usually caused by financial irresponsibility. Many
homeowners who find themselves in a default situation encounter circumstances
that are out of their control. Even so, this usually does not negatively affect
the condition of the property. However, if you are not an expert in buying
foreclosure properties, it is highly recommended that you seek the advice of a
professional who is experienced with these types of sales to avoid common
pitfalls.
Myth 4: Lenders want to
foreclose on homeowners. The foreclosure
process is costly and time consuming, and is a last resort for lenders to
recover their investment. When a homeowner defaults on a mortgage agreement, the
lender must first file a public default notice after which the homeowner is
given a grace period known as a pre-foreclosure period. During this time, the
homeowner can pay off the debt or choose to sell the property. The minimum
timeframe for a pre-foreclosure period varies by state and can range from 27
days (Texas) to 290 days (Wisconsin). Only at the end of the pre-foreclosure
period can the lender auction the property off to a third-party buyer or
repossess the property and sell it on the regular market.
Myth 5: Foreclosures
are often bought for pennies on the dollar. While it is true
that foreclosures are often purchased below market value, one should be leery of
anyone claiming that one can consistently find discounts of less than 10 percent
of market value. According to a RealtyTrac analysis of foreclosure sales in the
last seven months, the average savings on foreclosure purchases nationwide is
approximately 29 percent below full market value.
Myth 6: Foreclosure
buyers usually take advantage of the homeowner. While homeowners in
default should be wary of unscrupulous buyers and investors who try to take
unfair advantage of the situation, most foreclosure buyers can actually help an
owner to walk away with something to show for equity in the property and avoid a
bad mark on his or her credit history. During the pre-foreclosure period, a
potential buyer may approach the homeowner in default and arrange to buy the
property before the foreclosure actually takes place. This pre-foreclosure sale
also benefits buyers, allowing them to often purchase properties below full
market price.
Myth 7: Foreclosure
buying is only for professional investors. Perhaps at one time
this may have been the case, but with all of the tools available to today's
buyers, more people than ever before have the opportunity to purchase
foreclosure properties. Using online resources such as RealtyTrac's online
foreclosure database, potential buyers can search nationwide for properties in
pre-foreclosure, up for auction or banked-owned, as well as find extensive
reports on each property listed. Buyers can also get financing and find real
estate agents familiar with ins and outs of the foreclosure market to help
create a smoother transaction.
