Is it wise to be buying a house in foreclosure? The word foreclosure is ominous, but if you’re seeking a new home and are disheartened by how expensive properties are, it’s also an opportunity to get a house within or below your budget. However, there are still risks to this decision.
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Foreclosure is when a lender repossesses a homeowner’s property because the homeowner has failed to keep up their payments on the property.
But as a buyer, how do you buy a house in foreclosure? There are many ways to go about it:
While buying a house in foreclosure might be an attractive prospect, there are some drawbacks that you should take into account.
Foreclosed houses (commonly called repossessed houses in South Africa) are cheap, which is why property investors on the hunt to buy and then flip them will be ready to pounce once one becomes available.
If you’re at an auction to buy a repossessed house, be prepared for a bidding war.
(A short sale is when the homeowner sells their home for less than what they owe on their mortgage in an attempt to pay off what they owe to the lender before the lender forecloses on the house).
If a house is foreclosed, it is unfortunately sold in its current state. The homeowner won’t have money to remodel or even maintain it when they cannot afford to pay their mortgage. This could mean the house has serious problems that run deeper than peeling paint or scuffed flooring.
It’s also helpful to enlist the services of a real estate agent, as they might be able to negotiate a better price for you if the house is in a terrible state.
Buying a house in foreclosure doesn’t guarantee the house will be empty. If the home is vacant for a while, squatters will likely move into the property.
For example, in 2019, a property owner in KwaZulu Natal spent over R300 000 in legal fees to evict unlawful squatters from his property.
According to South Africa’s National Consumer Regulator, almost 2000 homes are repossessed every month by the bank and auctioned off without a fair market value assessment. This gives buyers an excellent opportunity to purchase a home at a bargain price. And that’s just one benefit to buying a repossessed house.
When you’re buying a house in foreclosure, the price of the home is generally much lower than its market value. This is true whether you bid for the house at an auction, buy the home from the bank through a real estate agent, or buy the home at short-sale.
Don’t let the current state of a repossessed house fool you when you’re buying a house in foreclosure. Imagine its potential, what it could be. Then take advantage of the low price, buy it, and make a profit in the future.
When buying a house in foreclosure, you are not required to pay a transfer duty fee.
Transfer duty is a tax that buyers must pay to SARS when taking ownership of a property. The amount will depend on the property value, but you can calculate your transfer duty fee with SARS.