Know the Pros and Cons of Buying a Foreclosed Home

What happens when you find a home in the perfect location and within your price range, but it's a foreclosure? Foreclosed properties may work well for the budget-minded buyer willing to take on any added repair costs. Before you proceed, learning more about the pros and cons of buying a foreclosed home can help ensure this is the right move for you.

The basics of buying a foreclosure

Homes enter the foreclosure process when the owner can't meet their mortgage obligations. If a homeowner falls behind on payments, the bank may agree to what's known as a short sale. This occurs when the seller uses the money they receive at settlement to repay their mortgage loan. The bank typically agrees to accept these proceeds as satisfaction of the mortgage.

Rather than agreeing to a short sale, the bank may move forward in the foreclosure process and assume ownership of the house. At that point, the house may be sold at auction, added to a foreclosed homes website or listed with a real estate agent.

Advantages

The main advantage of choosing a foreclosed home is a lower sales price. Foreclosures give buyers an opportunity to purchase a home below the average market value. Banks generally aren't interested in holding on to foreclosed properties, which tends to make them motivated sellers.

Foreclosed homes might need varying levels of work before they're move-in ready, because they're sold in as-is condition. Buying a foreclosure is one possible option for buyers stretching to find a home in a location where prices are otherwise out of their budget. You can also save money if you're willing to do some of the repair work yourself rather than pay a contractor.

The process

Foreclosed homes may be sold at auction, or they may be listed for sale by a bank. Purchase terms for foreclosures can be fairly rigid and often are non-negotiable. In some cases, you may not be able to do a walk-through of the home before an auction takes place. If you plan to participate in an auction, you'll need to provide an upfront deposit. If your bid is accepted, the house will generally need to be paid for with a certified check or in cash.

Foreclosed homes that aren't sold at auction may be referred to as real estate-owned, or REO, properties. When you buy a home owned by a bank, financing options are similar to a traditional home purchase, and you can secure a mortgage loan. If you prefer to work with a real estate agent, ask them about their knowledge or experience in foreclosures.

Potential challenges

If you're considering a foreclosure, it's helpful to understand the differences in the buying process versus buying a non-foreclosed home.

• Sold as-is: Even if you're permitted to bring in a home inspector, the bank or current owner may not be willing to pay for repairs. You should assume that you'll shoulder any costs needed to bring the home into satisfactory condition.
• Title issues: If the prior owner didn't pay utility bills or property taxes, there could be a lien on the home that must be cleared prior to settlement. Before agreeing to buy the house, you may want to ask a title agent to run a title search on the property to identify any existing liens.
• Settlement costs: Buyers of foreclosed homes may also be asked to cover more of the costs associated with the purchase. For example, closing costs typically paid by the seller may all fall on the buyer.
• Immediate payment: Many foreclosure homes that are considered good deals will sell quickly. That means cash buyers are in a better position to increase their chance of a successful purchase.

Is a foreclosure right for you?

Foreclosed home purchases can turn into labor-intensive endeavors, and they won't be the best option for every buyer. These homes often attract those who enjoy the work of remodeling or renovating a property and have the necessary cash to spend on repairs. Investors may also look to buy foreclosures at affordable prices and flip them or turn them into rental properties. They may also be a good choice for those who want to move into a certain area but need to stretch their budget.

If you're thinking about a foreclosure, research recent sales of non-foreclosed properties to make sure you're really getting a bargain. A real estate agent who has experience with foreclosures can advise you on property values and assist with price negotiations. When you're considering the pros and cons of buying a foreclosed home, you'll need to carefully weigh your personal needs and wants against your finances before deciding what works best for you.