3 Traps You Might Fall Into When You Buy a Discounted Home

Buying a home at a lower price than the going rate? Be very careful.

Home values have soared recently due to limited housing inventory and high buyer demand, fueled by low mortgage rates. As a result, many homes are now out of reach financially for buyers. But you may, in the course of your search, stumble across a property whose sale price is a lot cheaper than you'd expect it to be.

It could be that the seller in question needs to move quickly and wants a rapid sale. Or, there could be other reasons why the home is being offered at a discount. Either way, beware these traps when you buy a home for a lot less than you'd normally pay.

1. More problems than anticipated

Though it's possible for a discounted home to be in perfectly good shape, if you're buying a home under market value, you should assume something is wrong with it. Maybe that home has plumbing issues, or an electrical setup that isn't up to code. These sorts of problems can be very costly and complicated to fix.

So if you're going to buy a discounted home, make sure you have plenty of money left over in your emergency fund in case problems arise. At the same time, be sure to include a home inspection contingency in your purchase contract. That way, if your property inspection reveals problems with the home, you'll have a chance to back out without financial penalty.

2. Your property taxes could go up once you make improvements

If you're buying a home at a discount, you may need to sink money into it to make it more livable. That's an expense you might anticipate. But what may catch you off guard is that once your renovations are complete, your home could get reassessed at a higher value. And that could, in turn, cause your property taxes to rise -- in some cases, substantially.

Property taxes are calculated by taking your city or town's local tax rate and multiplying it by the value of your home. If you turn a home worth $300,000 into a property worth $400,000, your tax bill will reflect that.

3. High homeowners insurance costs

A home that's clearly out of date may not look as attractive as a more modern one. That's reason enough for a seller to offer it at a discount. But older homes may also lack safety features newer properties have. If that's the case, you could get stuck with a heftier homeowners insurance bill than expected.

When it comes to buying a home, you get what you pay for. It's possible to get lucky and snag a home at a discount for no specific reason. But much of the time, if a seller offers a property at below market value, there's a problem at hand. It could still pay to buy the home, but be careful about the extra expenses you might incur as a result. The last thing you want is to get in over your head and bust your budget so you can scoop up a deal.