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.