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It’s late at night and you’re hours into scrolling through every home listing website on the internet. Finally you find a home you like within your budget — but it’s foreclosed. Did you just strike gold or is buying a foreclosed home more trouble than it’s worth?
To help you decide how to proceed, let’s examine how foreclosure works and what the pros and cons of buying a foreclosure are.
How foreclosure works
For a home to become foreclosed, the homeowner must fail to make their mortgage payments. When this happens, the bank or mortgage lender can seize the home, as the homeowner agreed to use the home as collateral when they took on the loan. If the lender isn’t able to sell the home at a foreclosure auction at an amount that covers the remaining mortgage payments, then the lender takes over ownership of the property.
Banks and mortgage lenders don’t like to keep foreclosed properties for long, as doing so doesn’t make them any money. Because of this, if the house fails to sell at auction, they will put the home on the market in an attempt to sell it and recoup as much of the remaining mortgage as possible.
Foreclosure is generally a lengthy process and it takes time for the lender to repossess the home. Alongside unpaid mortgage payments, unpaid property taxes also lead to foreclosure.
Are foreclosed homes cheaper than normal homes?
Whether or not you’re going to get a steal of a deal on a foreclosed home depends greatly on where the home is in the foreclosure process.
The stages of foreclosure
There are three stages of foreclosure: pre-foreclosure, auction, and post-foreclosure. Buyers can purchase the home during any of those stages; however, who you buy the home from changes throughout this process.
If you buy a home that is in the pre-foreclosure period, you will buy the home from the homeowner and they will be able to avoid foreclosure. If you buy the home during the next two stages, then you will purchase it from the bank or mortgage lender.
- If the home is in pre-foreclosure. If the home is still in the owner’s possession, they may be willing to sell for a lower price in order to secure a short sale, or they may want to get a good price for their home so they can turn a profit. This depends on the seller’s needs and preferences, as well as the state of the real estate market.
- If the home is in the auction stage. If you buy a home in the auction stage, the bank or lender could let it go for substantially below market value so they can recoup their losses without having to put the home on the market.
- If the home is post-foreclosure. If you make an offer before anyone else does, you may be able to negotiate a good price or other money saving perks, like lower closing costs.
Is a foreclosed home a ‘bad’ home?
There’s no reason to believe that a foreclosed home is a bad one. Just because the homeowner struggled to pay their mortgage or property taxes does not mean the property is necessarily unfit in any way (although it can be).
Where foreclosure causes problems for buyers is the amount of time it takes to buy a foreclosed home. When you purchase a home directly from a homeowner, you can wrap up the process in just six to eight weeks. With foreclosed properties, that timeline is much longer and it can take six months for a year to close on the home, because in some states owners have a few months to buy back the home after foreclosure.
Another issue you will run into is that you must purchase foreclosed properties “as is,” which means even if a home inspection reveals repair needs, the owner (now the bank or lender) won’t make repairs. While plenty of foreclosed homes are in good condition, some homeowners struggling with their finances may have let maintenance slip, so it’s important to have some money set aside to make these repairs yourself.
The pros and cons of buying a foreclosed home
Before you dive in and make an offer on a foreclosed home, take some time to consider both the benefits of buying a foreclosed home, as well as the disadvantages.
Pros of buying a foreclosed home
- Lower cost. More often than not, foreclosed homes cost less than comparable properties that aren’t in the midst of foreclosure. Because lenders are eager to cover their losses, they tend to not price them more competitively than they need to.
- Good mortgage options. Similar to a non-foreclosed home, you can pursue regular mortgage financing when it comes time to buy a foreclosed home.
- Bargaining power. Because banks and lenders want to offload foreclosed homes as quickly as possible, they often pay the real estate agent’s commission and will negotiate other concessions on things like price, escrow length, closing costs, and down payment. Now is the time to negotiate for what you want.
Cons of buying a foreclosed home
- You need to move quickly. Because banks and lenders don’t want to take their time here, they will sell the home to whoever qualifies first. This means you need to act fast if you want the home, as they won’t wait around for the best offer. Don’t expect to get into a bidding war on a foreclosed home.
- You have to wait for the owners to move out. Even if you purchase a foreclosed home, that doesn’t mean the original owners have to get out the very same day. Each state has different foreclosure laws and in some cases, the original owners have months to buy back the home uncontested. During that waiting period, they can keep living in the home and you won’t know if you actually get to call it your own until that time period ends.
- Home will sell as is. We mentioned this earlier, but it’s a big con, so it’s worth repeating. When you buy a foreclosed home, chances are it will list “as is” which means that even if the home needs repairs, the bank or lender will not make them. You need to take the home inspection results seriously and decide if you want to deal with any repairs they uncover on your own.
- Potential extra costs. Repairs aren’t the only potential extra cost you may face. When you buy a foreclosed home, there is a chance you will need to pay transfer taxes, superior liens, or taxes on the property if there are issues with the title. With a foreclosed home, it’s more important than usual to buy title insurance. Even if the bank or lender owns the property, this isn’t a guarantee that the title is clear of liens.
Whether or not a foreclosed home is a good fit for you will depend a lot on your budget, your willingness to be flexible when it comes to repairs and timeline, and whether or not you actually fall in love with a foreclosed home. Take some time to weigh the pros and cons of buying a foreclosed home so that way if you do find one you want to buy, you know what you’re getting into and how you want to proceed.