Purchasing a repossessed property: the pros and cons

By Nicole Comendador 21 June 2022 | 1 minute read

You may have heard about repossessed properties, but do you know how they work? What happens when someone becomes unable to make their mortgage payments, and the property is taken back by the lender? How do you find these homes in order to buy them? And is it worthwhile financially?

A repossessed home refers to a property bought or acquired through a loan that has been defaulted by the original homeowner and is repossessed by the lender or bank. 

This is not to be confused with foreclosure, which is the process where the lender tries to recover the amount owed on a defaulted loan. To simply put it, repossession of a property is the result of a foreclosure.

A lending institution can repossess a property if they are unable to collect on their loan from the borrower, or if they believe that there is no hope of collecting. These homes are then being sold at reasonable prices in an effort for the bank to offload the property and recoup its costs.

Why do properties become repossessed?

A property can be repossessed for a variety of reasons. The most common are:

  • Lack of funds to pay for repairs, taxes, insurance and utilities.
  • Default on mortgage payments or failing to make monthly mortgage payments.
  • Bankruptcy or foreclosure (i.e. being sued by the bank).
  • Eviction from the property due to non-payment of rent or other issues related to the tenancy (i.e. you're evicted from your house).

To understand the sale of a repossessed property, let’s say that the original property owner still owes $800,000 to the bank for their property that currently has a market value of $1,600,000.

After failing to settle their monthly mortgage payments for a certain amount of time, the bank repossesses their property and sells it for $850,000. For potential buyers, this can be a bargain. They can buy a house for half of its current value. 

It’s a win-win situation since the lender is repaid and the borrower will be free from their loan obligation. However, not all repossessed property can be sold immediately. Potential buyers may bid lower than the stated price and if the property is sold at $750,000, the original property owner may still be liable for the remaining $50,000.

 

Pros and cons of purchasing a repossessed property

Buying a repossessed home can be a great way to get a good deal on an investment property or your own home, but there are also distinct drawbacks that you need to be aware of before making the purchase.

 

Pros

  • Getting a property fast and at a low price

Repossessed homes are usually sold at a fraction of their market value. In most cases, these properties are sold urgently as banks and lending institutions are focused on regaining the money they lost from the foreclosure. The longer a repossessed property is empty, the more losses they incur. 

Another advantage of buying a repossessed home is that there are no transfer fees or duties, as well as discounted fees. This is to make a property more attractive to buyers and easier to sell.

  • Flexible financing

The buyer can negotiate their financing options should they wish to proceed in purchasing a repossessed home. This means no need for financing costs as well as solicitor fees associated with buying or selling houses - which often add up quickly over time.

Assuming that the potential buyer has no delinquencies, they can easily avail of a repossessed property in a financing scheme that the lender deems fit.

  • You can inspect the property to see if it is worth buying

Before making an offer, you can inspect the property, which is not possible with other types of distressed properties like foreclosed homes. Banks and lenders go through their own inspection of the repossessed property before they make it available for sale so they can determine its price. 

For some properties, there will be no need for repairs as they have been checked by an independent surveyor and passed as fit before being put on the open market, so you will not have to spend extra money on contractors or architects to make any changes in order to live there comfortably.

 

Cons

  • Properties may be in poor condition

Some repossessed properties are often in poor condition. This is especially true of repossessed homes, as people don't always know how to maintain a house. The previous owner may live in it for years and not realise that there's a problem until the bank forecloses on them and sends in an inspector. 

The inspector finds plenty wrong with the home and sets their price low so they can make some money off of it quickly. Some foreclosure sales are "as is", which means you won't be able to negotiate repairs or upgrades before making an offer.

When you do proceed with the purchase, the cost to repair damages and its maintenance might pile up and become too expensive compared with how much you paid for the property.

  • Properties may be located in bad neighbourhoods

Bad neighbourhoods mean crime rates will be high, which makes them uncomfortable places to live even if your house is new or well kept up by previous owners. 

If you have children living there with you then this can cause even more problems than normal. You'll need to worry about safety issues like getting mugged while walking down the street at night (if there aren't any footpaths) or having your car stolen while parked outside due to poor lighting from nearby street lights being out.

 

How do you find repossessed properties?

Most repossessed properties can be found through the website of banks and lending institutions. There are also property listing websites that provide leads to repossessed homes and properties.

It’s important to note that both buyers and sellers can use these sites. If a seller has repossessed the property and is trying to sell it, they will list their property on these websites. If you are looking for a buyer, there are also services available through these sites. 

However, if you want more control over your search and want access to properties before they go live on the internet, contacting a real estate agent in your area could be your best bet.

Things to remember

Before making an offer on a property, make sure you know what you're getting into and that you have the financial support if needed. There are several things to keep in mind, start by understanding what type of property you want and how much money you have available to spend on it. 

Maybe you're looking for an investment property that will provide positive cash flow each month or maybe it's just a way for your family to get into their first home. Regardless of your situation, make sure that the home is something that meets both your needs and budget before making an offer.

Conclusion

Repossessed properties can be risky, but they also have the potential to save you thousands of dollars on your purchase. If you do your due diligence and get a good deal on the home, the process can be relatively smooth and stress-free.

RELATED TERMS

Property

Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.

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Purchasing a repossessed property: the pros and cons
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