One out of every 200 homes in America faces foreclosure at least once during its useful life. This churn of houses through foreclosure creates valuable opportunities for buyers with the resources and risk-tolerance to take advantage of them.
Purchasing foreclosed homes is not for everyone, however. Keep reading to learn the pros and cons of buying a foreclosed home and whether this unique investment opportunity might be right for your situation.
What Is Foreclosure?
Few homebuyers can afford to pay cash for a house. Around 60 percent of homeowners in Pennsylvania actively rely on mortgages to afford their homes. So long as they continue to faithfully pay on those mortgages, that arrangement works out well.
Changes to income, employment, and other factors can cause a homeowner to default on their mortgage contract, however. Banks often work with homeowners in an attempt to bring a defaulted loan current. Should homeowners be unable to pull themselves out of arrears, the mortgage lender may force the home into foreclosure.
Owners forfeit their ownership of the home, which then becomes bank owned and is put up for sale.
How Foreclosure Sales Work
Foreclosure sales typically take one of three forms.
First, there is the short sale. During a short sale, the existing homeowner attempts to sell the home. Usually, the proposed sale price is less than what the owner still owes on their mortgage.
While buyers tender offers to the homeowner, it is the bank that holds the lien which must approve the sale. Waiting for such approval can be time-consuming and tedious.
Second, foreclosed homes may sell at an auction. Homes sold at auction always sell “as-is.” No inspections or appraisals are done beforehand or during the auction itself. Most auction buyers must pay in cash at the time of purchase.
Finally, banks may clear the titles of foreclosed homes, evict their prior residents, and then sell the homes themselves. Buyers tend to need real estate agents to negotiate these sales on their behalf and, like at auctions, properties are sold “as-is.” Buying from a bank, however, gives buyers the opportunity to inspect a property before purchase.
What It Takes to Buy a Foreclosed Home
Would-be buyers interested in foreclosed homes need slightly different preparation than buyers angling to purchase homes on the traditional real estate market. Specifically, buyers need:
- Cash or a pre-approval Letter
- Experienced agents
- High risk tolerance
Whether a foreclosed home is being sold by its owner or a bank, nearly all sales require buyers to pay in cash. Where cash is not required, buyers must have documentation showing financing pre-approval.
Importantly, though, securing financing can be tricky. Mortgage lenders are often reluctant to finance the purchase of uninspected, unappraised properties. Interested buyers who need financing must start the process of securing it well in advance in order to have it in place when they are ready to buy.
Experienced agents are a necessary part of the buying process. Not only will many banks not negotiate with buyers directly, but agents can help buyers make smart choices by providing information and insights buyers would not otherwise have access to.
Time and Risk Tolerance
Purchasing a home is never a fast process and buying a foreclosure can be far slower than buying a home on the traditional market. Properties in foreclosure can also have hidden problems or need work that buyers won’t know about until post-purchase. Most states also allow the owners of foreclosed homes a window of time post-foreclosure in which to reclaim their homes.
Thus, foreclosure properties are not suitable for buyers in a hurry or who have a low tolerance for risk or change.
Pros and Cons of Buying a Foreclosed Home
Among the excellent benefits of buying a foreclosed home are that:
- Buyers can often purchase more home than they would otherwise be able to afford for their budget
- Homebuyers can often purchase homes in neighborhoods they could otherwise not afford
- Foreclosure properties can be ideal investment opportunities
- Fewer buyers tend to compete for foreclosure homes, giving buyers an advantage in a competitive market
Chief among the cons of buying a foreclosure property are that:
- Closing can be slow
- All sales are “as-is”
- Would-be buyers rarely have the opportunity to inspect property pre-purchase which can lead to unwelcome surprises
- Grace or redemption periods mean that sales are not necessarily final
- Squatters may force buyers to deal with adverse possession proceedings
How these pros and cons balance out can vary depending on market demand, buyer priorities, and other factors.
Is Foreclosed Property a Good Deal?
Certain buyers will find that foreclosure properties offer the deal of a lifetime. Flexible families with tight budgets can use foreclosure conditions to secure beautiful homes in high-end neighborhoods. With a little patience and work, such families can reap enormous personal and financial benefits over the period they own the home.
Investors with the cash flow to snap up and renovate properties may find foreclosure properties a profitable and appealing way to expand their incomes.
Choosing a foreclosure property isn’t right for everyone, however. Notably, it may be less rewarding or appropriate for buyers:
- Who need traditional mortgage financing dependent on appraisals and inspections
- Seeking to move into a property soon after a sale
- Unable to invest in maintenance, repairs, or renovations
- Lacking the time and financial flexibility to address unexpected situations post-sale
How to Find Foreclosures
Prospective buyers interested in foreclosed homes can find available properties through:
- Official HUD listings
- Fannie Mae’s HomePath or Freddie Mac’s HomeSteps
- Local real estate experts
Of these, the best option tends to be a local realtor. Real estate professionals provide unique insight and assessment capabilities that can help compensate for buyers’ lack of ability to inspect a property prior to purchase. They can also assist buyers in projecting the potential return on investment of any given property based on broader market information.
Explore Your Options
Now that you understand the pros and cons of buying a foreclosed home, it’s time to explore your options. Contact us today and let our experienced agents help you identify local properties that align with your budget and priorities.