Should I Buy a Foreclosed Home? Is it Right for Me? 

 January 28, 2021

By Scott Teesdale  

minutes read time

Unless you have bought a house or work in the mortgage sector, you might have very little knowledge of what a foreclosure is and if it’s right for you. To any homeowner, the mention of the term foreclosure sends chills to their spine. The term may spark interest and curiosity in a home buyer, as it’s often understood that a foreclosed home is cheaper.

Foreclosure is the process where a mortgage company or a bank seizes property after the owner is unable to pay the mortgage according to the agreement. The bank or the mortgage company may then decide to add the property to the foreclosure listing to recovers its money. This is usually the last step when the lending institution has given the homeowner a chance to pay up, but they cannot.

Brief review of the foreclosure process

In a nutshell, there are three to four stages in the foreclosure process:

Preforeclosure properties are homes that are still technically owned by the homeowner but when they are in default (i.e., they haven’t paid their mortgage in at least one month). When a homeowner does not reimburse the mortgage for a pre-specified amount of time, the lender sends them an eviction notice. The mortgage firm or bank later seizes the property, evicts the owner of the premise, and looks for a buyer to get the money they lent to the homeowner. This is where the home buyer gets their chance.

Auction properties are homes that the lender or bank has decided to list at a public sale. These are what we, and most people, would consider “foreclosed homes.” Although there are a few ways to buy a foreclosed property without cash, most of the time the buyer agrees to pay all debts, dues, and taxes on the home and in exchange, receives the property and full ownership of the property.

Real estate owned (REO) is the stage that occurs if the home does not sell at public auction. It means the lending entity now officially owns the home. The foreclosure sale (or “auction”) is concluded with no other purchaser buying the real estate.

And finally, sometimes there is a fourth stage. When a property is insured by a federal agency, such as HUD or Fannie Mae, or “guaranteed” by the Department of Veterans Affairs (VA), the properties are eventually acquired by the government. When such properties are foreclosed by the mortgagees, the agencies reimburse the lenders for the loan amount and certain costs of foreclosure. The government then takes ownership of the real estate and makes arrangements to sell the properties to the public through contractors and Realtors.

Advantages of buying a foreclosed home

Let’s cover some of the reasons a buyer would want to bid on a foreclosed home.

1. The buyer can strike a good deal

The property is being sold to recover the amount that has not been paid up by the homeowner. In this case, a buyer can purchase the property cheaper than the property’s estimated market value. The fact that the banks want the property sold faster, and there is the distress call, prices of the foreclosed homes are relatively low compared to buying a house or taking a mortgage to purchase one.

2. It has a higher bargaining power

You cannot compare buying a new house and a foreclosed home. A new house has everything all good and working, whereas a foreclosed home is in distress. When a buyer is purchasing a new house, there is a threshold that the seller cannot go below even when convinced otherwise. On the other hand, a foreclosed home has to be sold so that the loan can be paid up. In this case, the buyer gets bargaining power. A buyer can bargain on the basis that the home needs repairs and improvements.

3. Accumulation of equity

People in real estate know that the purchase of a foreclosured home can be a lucrative business. Most of the time, there will be growth and development in the neighborhood. The purchased house will gain more equity compared to the neighbors since the buyer purchased it at a lower price. People in business work to increase the appraisal value of the home in order to increase its resale value, thereby selling it for a profit.

4. Clean title deed

Purchasing a foreclosed home almost guarantees the house title is free and clear of any encumbrances or undisclosed debts. The reason is because the seller is a bank and one can safely assume the bank has already done their due diligence. They’ve probably already done a title search. The homebuyer should also do the same but it’s less likely a bank is selling faulty title.

Disadvantages of buying a foreclosed home

But wait! There are some disadvantages from purchasing a foreclosed home.

1. High demand

Both private individuals and real estate firms try all they can do to get their hands-on foreclosed homes. Individuals are doing this to save themselves a few bucks while the real estate agencies are doing it to maximize their profits.

2. Hidden costs

If a homeowner gets to the point of failing to pay the mortgage, they are financially broken. A home needs finances for maintenance and repairs. That means that there is a very high probability that the house needs a lot of repair and modifications. As a buyer, you need to run an inspection to know the home’s actual value. If the house needs many repairs and remodeling, then the buyer might want to reconsider.

3. Involves a lot of paperwork

Remember, as the buyer; you are not purchasing the house from the original owner but from a company that has seized it. There is a lot of paperwork that needs to be done. This is to ensure that there is a legal transfer of the property from the owner to your name. Buying a house is not a business that takes one day. There must be legal formalities to follow. Purchasing a foreclosed house even takes longer since additional papers give consent to the bank or company to sell off the property.

Wrapping up

Whether to buy or not to buy is something that a home buyer has to sit and contemplate. Though it will save money, it is a slow process that might end up expensive than thought. If a buyer decides to purchase on a cash basis, then he or she can comfortably enjoy the house without the worry of debt. If the buyer’s purpose is to buy the house on credit, he or she must be keen not to fall into the same trap. Though it might seem like forever to make the payments and registration of the property, it gives the buyer time to do a home inspection to get assurance that there is value for your money.

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I use data and technology to help Millennials navigate the ins-and-outs of buying or selling a home in today's market. From appraisals to mortgages to zoning, I cover it all with the goal to teach others. Connect with me on social via the icons above.