Buying a home in foreclosure might mean clinching a bargain, but it’s not without risk. Whether you’re buying the property off of a struggling homeowner or trying to outbid other buyers during a real estate operated auction, you have the opportunity to purchase a property well below market value when you buy a home in foreclosure.
If you plan to purchase a property facing foreclosure, you’ll want to keep in mind the various pros and cons associated with the process so you’re well prepared for the road ahead.
What is a foreclosure?
When a homeowner misses several mortgage payments, the bank or lender will initiate the lengthy legal process to repossess the home so they may subsequently recoup the balance of the loan. There are other reasons a struggling homeowner may face foreclosure, including unpaid property taxes, but it is most often due to defaulting on the loan.
There are three stages of foreclosure– pre-foreclosure, auction, and post-foreclosure.
Purchasing a pre-foreclosure property means dealing with a seller who is doing their best to prevent foreclosure and dodge the devastating effects on their credit. Buying during the auction or post-foreclosure stage, instead, means dealing with the bank that now has possession of a home they are now tasked with liquidating.
Pros and Cons of Buying a Home in Foreclosure
The pros and cons depend on what stage of foreclosure the home is in when you choose to purchase the property.
Buy a Home in Foreclosure – Pre-Foreclosure Pros
One key advantage of purchasing a home pre-foreclosure is the bargaining power that comes with it. With the bank breathing down their neck, the seller will likely be motivated to sell fast and more willing to accept low ball offers, especially if you’re among the only offers on the table.
Purchasing pre-foreclosure properties also comes with the perk of acquiring full condition and title knowledge from the seller. The seller is required to provide a full history of the property’s condition, providing invaluable insight to the buyer.
One final pro associated with buying pre-foreclosure properties is the financial flexibility that comes with it. While a buyer is welcome to go the traditional route and secure a loan from a mortgage lender, other options include a lease-purchase agreement or mortgage assumption.
Buy a Home in Foreclosure – Pre-Foreclosure Cons
Buying pre-foreclosure means you’re early to the party, and so the price may not yet be attractive. If the seller is totally underwater, their lender will also get a say on your offer, and so nothing below fair market value will be accepted.
In addition, the transaction may drag depending on what’s going on with the seller. Since they will be required to move out and live elsewhere, it may take them time to find new accommodations, especially if they’re still in the midst of a financial crisis.
Finally, a drawback of purchasing a home facing foreclosure, regardless of stage, is the property’s condition. A former homeowner facing foreclosure did not have the money to make mortgage payments, so it’s possible and very likely they also could not afford essential repairs or basic upkeep.
Keep these drawbacks in mind when determining if the foreclosure is a good deal or a money pit waiting to suck you in.
Buy a Home in Foreclosure – Auction Pros
At this stage, the seller is now out of the picture and you’ll be dealing directly with the bank. This means you’re now more likely to secure a price below the market value within a reasonable timeframe.
Auctions typically require cash payments as well. That means you’ll beat out loads of other would-be buyers if they don’t have the cash available to purchase the home outright.
At the auction stage, you’ll have better odds of nabbing a deal, completing the transaction fast, and competing with less would-be buyers. It’s not a bad stage to consider stepping in.
Buy a Home in Foreclosure – Auction Cons
There are some drawbacks associated with the auction stage, however.
For example, the “cash only” nature of most auctions could work against you if you’re not particularly flush at the time you’re looking to purchase. In addition, the bank will now offer the property “as is” and is not required to provide disclosures about the property’s condition.
These factors increase the level of risk.
If the home enters this stage, it means the bank failed to unload it in the first auction and now they have a property on their ledger instead of their preferred “cash money.” Now they’re tasked with selling it on the open market or conducting a later real estate auction.
Since you’re out of the auction stage at this juncture, you’ll receive the benefit of financial flexibility yet again. Instead of needing a good reserve of cash on hand, securing a traditional loan is possible once more.
At this juncture, the bank will likely be eager to unload the property. A savvy negotiator can leverage this to receive concessions including the bank paying their real estate agent’s commission, accepting a lower purchase price or down payment, or even cover closing costs.
The standard con regarding the property’s condition applies here. Since the former occupant likely had little cash on hand to invest in upkeep, it’s unclear if you’re getting a deal or biting off more than you can chew.
In addition, the seller has no responsibility to share disclosures regarding the condition of the property or its history. You’re driving blind here.
Final Thoughts on Foreclosure Properties
As the saying goes – no guts, no glory.
There are various pitfalls associated with purchasing a property facing foreclosure, and it is often unclear if you’ve found an incredible deal or a headache that’s not worth your time or money. Keeping in mind the above pros and cons will help you navigate the process if you are, in fact, considering purchasing a home in foreclosure.
When in doubt, reach out to a qualified real estate agent in your area and have a chat about the specific property you’re looking at. An experienced agent always has insider knowledge that will aid you before or during the purchase.