Pros and Cons of Buying a Foreclosed Home

If you are looking at the possibility of buying a foreclosed home, you must first take into consideration a few things. While foreclosed homes are often bargains, they come with some costs too. When people speak of buying a foreclosure they may be referring to buying during two different stages of the foreclosure process. You may buy a foreclosed home at an auction; this is the forced sale by the court that is set after a judgment has been made. If the home doesn't sell at auction, it reverts to the bank that holds the mortgage. You may also purchase these properties, called bank-owned or REO properties. Whether you buy at auction or buy an REO property, there are pros and cons to each purchase.

Buying a Foreclosed Home at Auction

When you want to buy a property at an auction, you do not need a real estate agent. Although it varies based on the state that you live in, most real estate auctions are held through the clerk of courts in the county where the property is located. This is the case in places like Florida where they practice "judicial foreclosure." This means that the bank must file a lawsuit against the homeowners, and the court must give a judgment before the bank can take possession of the title or property. Often times, these auctions are held online.

Pros

• Auction pricing is based on the outstanding mortgage balance on the home. If the homeowner has a lot of equity, the price of the home may be very low compared to its market value.
  
• Buyers at a foreclosure auction are expected to pay cash. Many people don't have access to large amounts of cash, so this reduces your competition.

Cons

• If you are the highest bidder at an auction, you are expected to pay cash the same day in most cases.
  
• The buyer assumes all of the risk when buying a property at auction; the purchase is 'as is.'
  
• You do not have the time or opportunity to inspect the property before you bid.
  
• The property may have other liens or mortgages. The homeowners may owe back taxes.
  
• The bank is unable to give you any information about the history or condition of the property.
  
• The bank has the right to buy the property at the auction, and may buy it out from under you if it believes it will lose too much money with the sale.
  
• Disgruntled homeowners damage the home. In fact, they may still be living there. You may have to evict them.
  

Buying a Bank-Owned Foreclosed Home (REO)

When buying an REO property, you need a real estate agent. Look for a broker that specializes in REO homes. Most lenders work with one or two brokers to list all of their REO properties and maintain a close relationship. You also need to find a lender and get pre-approved before buying an REO home. These properties are usually great deals, so they go quickly and you may not have time to secure funding after you make an offer.

Pros

• Banks don't want to be real estate brokers; they are motivated to sell, so they will negotiate many of the terms of sale. In states with high foreclosure rates, banks are even more motivated to sell.
  
• You will get a clear title from the lender.
  
• You can secure financing for the home and do your due diligence.
  
• The house is vacant.
  
• Properties are listed on the MLS.
  
• The bank typically pays your agent's commission.

Cons

• You are purchasing the home 'as is.'
  
• The bank cannot provide history of the property.
  
• The bank typically requires extra paperwork for the sale.
  

If you are considering purchasing a foreclosed home, contact us with questions or to help with your lending needs.