Many buyers look to purchase foreclosures due to the perceived notion that they are cheaper than the average home offered for sale. This may or may not be the case. In some cases, the lender who owns the home may list it for the full appraised value, making it no better deal than any other house on the market. Additionally, homes that are in foreclosure may be damaged by the previous owner, making the eventual repair a costly option. Before purchasing a foreclosure, be sure to inspect it to make sure the value is as stated.
In a foreclosure, the borrower quits paying the mortgage payment and the lender reclaims the property as payment on the outstanding debt. At the point of foreclosure, the home is no longer owned by the borrower but by the bank. The act of foreclosure does not affect the value of the home as determined by an appraisal. It may, however, affect the sales price.
The appraisal of a home is the calculation of the value of the home as compared to others in a nearby radius, typically its own neighborhood. Homes of similar size and age sold within the past six to 12 months are used for the comparison. The average price of these homes, with adjustments made for certain features and variances in size, determines the appraisal price on the home. The appraisal price, however, may not be the sales price of the home. The lender who will now sell the home that is in foreclosure may list the sales price as the full appraised value or a number closer to the amount the borrower owed on the mortgage. In most cases, the lender starts the listing at the full appraised value.
Foreclosure Effects on Value
While the mere act of foreclosure may not affect the value of the home, the after effects of foreclosure may affect the entire neighborhood. For example, if your home goes into foreclosure and the bank sells it at a price much lower than the appraised value, the comparable prices for the entire neighborhood are lowered. This means that when your home goes into foreclosure, the appraised values for the other homes in the area could be affected as well. In some cases, lenders allow comparable properties that are sold at much lower prices to be removed from an appraisal, but some do not.
Important to Note
At the point of foreclosure, the appraised value is no longer an issue for the borrower. At that point, the borrower is no longer the owner of the property and can receive no benefit from the sale of the property. The appraised value is irrelevant to him. Additionally, the borrower’s credit score will be negatively impacted by the foreclosure and it could easily be years before another lender will lend the borrower funds for any purchase, much less the purchase of a residence.
Lynn Lauren has been a professional writer since 1999, focusing on the areas of weddings, professional profiles and the banking industry. She has been published in several local magazines including "Elegant Island Weddings." Lauren has a Master of Business Administration and a Bachelor of Business Administration, both with marketing concentrations from Georgia Southern University and Mercer University, respectively.