A foreclosure occurs when a homeowner is unable to meet the obligations of their mortgage or another lien in some way. If they become too far past due, then the creditor can move to foreclose upon the home as a way to resolve the debt which accumulated.
After the foreclosure is complete, the property belongs to the bank instead of the homeowner. At that point, the bank may choose to sell that property to someone else. This ownership transfer occurs because the bank forecloses on either the mortgage or trust deed for the property, then seizes it.
In 2017, foreclosure activities in the United States reached a 12-year low.
There are some pros and cons of buying a foreclosure that are worth considering if you’re in the market to purchase real estate. Here are some of the key points to examine.
List of the Pros of Buying a Foreclosure
1. It follows the same process as any other property transaction.
If you’re thinking about the purchase of a foreclosure, then you can still use traditional financing packages to make it happen. You can obtain FHA and VA loans in the United States for these properties. Because banks are not in the business of rehabilitating properties, they are anxious to get rid of them at a price which is profitable for them. Making a fair offer on a foreclosure is an easy way to close a quick sale.
2. The title on a foreclosed home is clear.
When you take over a property from another owner, there could be back taxes, liens, or even mortgages still on the title of the property. The selling process should remove these items, though not always. Purchasing a foreclosed property means you are purchasing a clear title. All the issues described in this point are removed as part of that legal process. That means you just need to worry about the condition of the property itself.
3. The bank might repair the property for you.
As with any real estate transaction, you can negotiate what happens to the property as part of the sale. One of those conditions might be to have the bank finance any repairs that need to be made to the house. Although not every bank will make this decision, a property which has stood vacant and unprofitable for some time might give you some negotiating leverage here.
4. It can speed up the path toward home ownership for some families.
Foreclosures are often sold for less than the going market value of real estate in the community. Some properties may have price reductions of up to 40%. Because of this reduced cost, more families may be able to access financing for the property and move into a home of their own sooner than they may realize. Although there may be higher repair costs with an as-is property, there are also opportunities to turn that house into a home.
5. You can purchase a home with upgrades.
You can typically purchase more home for the amount you can afford when looking at foreclosures as well. If you’re looking to purchase a home with certain upgrades, this is the best way to find a property which fits within your price range. Some of these upgraded properties are in good enough condition that they can be used right away as a primary home. It is an easy way to make your home-buying dollars stretch further.
6. It can become an investment property.
Most foreclosures need some type of repair to make them attractive to future home buyers. If you take this investment on, then there is a good chance that you could turn a profit by flipping the home in a couple of years. If you can restore a property that you got at a 40% discount, then you’d be able to sell it at full market price. Let’s say you get a $200,000 home at $120,000 as a foreclosure. You spend $20,000 to restore it, then another $10,000 on property upgrades. You still have the potential to make $50,000 on the transaction.
List of the Cons of Buying a Foreclosure
1. Homeowners can spend a lot of time on their property.
In the United States, homeowners who go through a foreclosure proceeding and have a mortgage may be able to stay on their property for nearly 12 months. Even when trust deeds are used, property owners have nearly four months to be in the property before it is eventually sold. That can be a long time to wait for someone looking to invest into a distressed property.
2. There is no guarantee on the property condition.
Homeowners going through a foreclosure have nothing left to invest into the property. Why spend money on something you’re about to lose? Many foreclosures have damage that must be repaired before the property can be returned to a saleable condition. Most have appliances which need to be replaced to make the unit habitable. Some may be sitting vacant for long time periods, which invites pests, squatters, and other property management issues which must be resolved.
3. The homeowner might still be on the property.
Just because the legal foreclosure process has completed does not mean the homeowner has actually left the property. Whether the foreclosure is judicial or non-judicial matters in some states. Judicial foreclosures often take much longer to complete. Until the property is assigned to a new owner, it is still technically yours. It is up to the new owner to evict you, which is a separate court proceeding in some states.
4. You pay the property in full for the transaction.
Many foreclosed properties are taken to auction as a way to recoup losses for the bank. This process requires you to pay off the price of the house agreed upon in full at the time of purchase. That means you’ll need to have a preauthorized mortgage approval at the very least to participate in the purchasing process. Some banks may require the financing to be in place before you attempt to make a purchase.
5. Many properties sit vacant for months, if not years, before purchase.
Even with regular checkups on a foreclosed property, once a home reaches the REO phase of the process, a real estate owned property can sit vacant without regular maintenance for years at a time. Everything from mold buildup to broken pipes to stolen appliances can happen within a foreclosed home, even after you’ve initiated a process to purchase it. Most properties like this are sold as-is, which means no repair requests can be made as part of a sale contingency.
6. There can be slow response times during the purchasing process.
Lenders do want to offload foreclosed properties quickly. It is also important to remember that they want to make as much money off the sale as possible. Even if you have a contract in place, most transactions have a stipulation that allows a lender to cancel the sale at any time until the closing actually happens. If someone comes along with a better offer on the foreclosure, even if you’re about to sign the paperwork, there’s a good chance that you could lose the property you want.
7. There can be mortgage complications with foreclosures.
It often requires a non-standard loan to finance a foreclosure. Traditional mortgages require the current value of the property to be appraised. Damage caused during a foreclosure lowers this value. Some mortgages require the home to be in a minimum state of quality as well and demand repairs before issuing the financing, which negates the purchase. Not every lender offers a mortgage for a distressed property either. Some buyers may find it difficult to get the financing they want.
8. Foreclosures have a lot of competition in each market.
A foreclosed property offers a lot of potential value to a purchaser. Because of that, the competition for these homes can be very steep. You may find that some listings are available for 24 hours or less. That speed makes it difficult to secure financing. Many banks prefer to work with those who have cash in-hand to finalize a purchase as well because it makes their lives easier. You may find it to be an easier shopping process to pursue a home out of foreclosure in markets that are heavily competitive.
9. Agreements can be made before the foreclosure finalizes.
Proactive home buyers may contact people living in distressed properties about purchasing their home before the foreclosure is completed. The goal of such contact is to create a short-sale opportunity. Other homeowners may opt to turn over the deed to the property in lieu of the foreclosure proceeding and just walk away from the home. When agreements are made before the foreclosure process begins, it can be difficult to identify homes that are potential targets.
10. Fees are often charged to research foreclosed properties.
You can work with a local retailer to close on a foreclosed property in some instances. You may need to research foreclosed properties in your area through a third-party or through the local court system, however, and that means there are fees to pay without a guarantee that you’ll find a property you like.
11. Auctions often require you to pay off the sale amount quickly.
In Florida, Palm Beach County requires a bidder at a Sheriff’s sale to pay off the price of a property by 3pm of the day they purchased it. That gives the winning bidder just 6 hours to get the money they need. Many auctions require a cashier’s check or cash-on-hand to even start bidding in the first place. If you’re unable to pay for the property in full, then you could lose the cash deposit you made for the right to bit.
12. There can be land-use issues involved with the property.
Many properties are zoned for residential use and purchasing them at a foreclosure auction offers the chance at a great deal. For some properties, that is not the case. There can be zoning issues with some properties that may require a lengthy financial obligation to clear. There could be contamination issues that must be cleaned up when you’re the new property owner. There could even be toxic waste on the property. If the lender doesn’t show up for an auction, then you probably shouldn’t bid on that property.
13. You may be asked to purchase it blind.
Many foreclosed properties do not allow for a personal inspection or an appraisal before an auction or financing arrangement take place. That means you’re going into the property blind. You could wind up with a gem. You could discover a huge mess that could be difficult to clean up. In some instances, if you obtain full control of a property before the lender does, you may be stuck clearing the title before you can do anything with the property.
The pros and cons of buying a foreclosure describe a transaction that entails some risk. If you shop smartly for a foreclosure, you might find yourself getting a good property at a great deal. You might also discover layers of hidden damage with the property that make the investment something that you may regret. By evaluating all the pros and cons for this type of transaction, the risk of finding a money pit can be reduced.
Blog Post Author Credentials
Natalie Regoli, Esq. is the author of this post and the editor-in-chief of our blog. She received her B.A. in Economics from the University of Washington and her Masters in Law from The University of Texas School of Law. In addition to being a seasoned writer, Natalie has almost two decades of experience as a lawyer and banker. If you would like to contact Natalie, then go here to send her a message.