Pros and Cons of Buying a Foreclosed Home
With interest rates rising and home prices remaining high, you might be considering buying a foreclosed home to save some money. While foreclosed homes are often available for a discounted price, there are some tradeoffs involved.
Here are the benefits and risks you should know before buying a foreclosed home.
What is a foreclosed home?
When a homeowner is no longer able to keep up with their mortgage payments, they risk foreclosure. A foreclosure happens when the bank or lender who offered the home loan seizes the property from the home buyer.
Though home foreclosures decreased in 2021, the foreclosure rate has been increasing in 2022, encroaching on pre-pandemic numbers.
The foreclosure process varies from state to state — and there are different types of foreclosures. In general, a bank will often attempt to resell the foreclosed property to try to offset or recoup some of its financial losses.
Pros to buying a foreclosed home
In most cases, buying a foreclosed home comes with some inherent benefits that can make the path to homeownership easier and more affordable. Here are some of the most common pros to consider.
Lower home price
Most banks want to sell foreclosed homes as quickly as possible. Every month they hold on to the property is another month they’re not making money off of the mortgage.
Because of this, many banks will often set foreclosed home prices lower than average and could entertain offers lower than market value.
The median price for a foreclosed home in 2020 was $180,250, well below that year’s average price for all homes, which clocked in at $281,438.
Alternatively, if you’re looking to save money when buying a home, consider buyer rebates that can make the upfront costs more affordable.
Faster home buying process (in some cases)
If you want to close on a home sooner, buying a foreclosed home may help ramp up the closing time frame, as long as the home has already been foreclosed on and is now in the bank’s possession. Although the exact timeline of the closing process can vary by location and individual property circumstances, on average, buying a foreclosed home may take less time.
Better bargaining power
Since banks are eager to sell foreclosed homes and start recouping some of their losses, that puts the buyer in a great position to negotiate. You can often get better concessions with a foreclosed home, such as a lower down payment agreement or reduced closing costs and escrow length.
Chat with your real estate agent to find out if you have any extra bargaining power on a foreclosed home in your area.
Investing potential
If you’re looking to invest in real estate, buying a foreclosed home may be a more affordable way to get your foot in the door. Securing a distressed property at a discount can help you flip it for more money down the line.
Cons to buying a foreclosed home
While the drawbacks to purchasing a foreclosed property will also vary from home to home, there are some general risks to look out for.
Buying the home ‘as-is’
Though it’s possible to order a home inspection on a foreclosed property, it’s not always possible. In many cases, you’re buying a property “as-is” and may not even be able to tour the home before buying it.
This is particularly true if you’re buying a foreclosed home from an auction or if the owners are still living in the property. In these cases, you’ll often have to forego the inspection to make an offer on the home — which can be a risky move. It’s rarely advisable to buy a home without having a thorough inspection done.
Tedious home buying process
Sometimes foreclosed homes are sold quickly, but that typically only happens when all of the paperwork is in order and the original buyers have already exited the property. Depending on when you bid on a foreclosed home, the process could be more complicated, and tedious.
If the bank you’re buying from is inundated with foreclosures, for instance, it can take them longer to respond to your bid or communicate throughout the closing process.
Extra costs
There may also be some extra, hidden costs involved in buying a foreclosed home. Before you can start the buying process, the IRS requires any back taxes or liens on the property to be paid off.
You’ll be responsible for paying these extra costs if you hope to obtain the home at a discount. In some cases, it might still make financial sense, but sometimes these costs tally up to more than it's worth to continue going after the property.
Steep competition
With home supply unable to keep up with demand, you may face fierce competition when shopping for a foreclosed home. This can lead to higher bids, a longer bidding process, or might even cause you to agree to concessions you otherwise wouldn’t (for instance, forgoing inspection).
Other factors to consider before buying a foreclosed home
You can find foreclosed homes just about anywhere, but depending on where you live, you may be limited in where you can find foreclosed properties. This might mean moving out of a community you enjoy or sacrificing a desirable school district.
Although you can limit your foreclosed home search to specific areas, it doesn’t mean you’ll find the home you’re looking for. You may need to broaden your search and be open to moving to new areas.
Lastly, just because you’re buying a foreclosed home doesn’t necessarily mean you’re getting a deal. A real estate agent can offer comparative research to help you better understand if the pricing is in line with comparable homes in your area.
Does buying a foreclosed home make sense for you?
Figuring out if you can afford to buy a home is the first question you want to answer before reviewing home options. If you have a stable job and can afford the upfront and monthly costs, then you can start to explore foreclosed homes.
The time you’re willing to wait and whether or not you want to get into bidding wars are two factors worth considering. But ultimately, whether or not you opt for a foreclosed home may hinge on the available home inventory in your local market.
We recommend talking to your agent about what you’re looking for in a home. If a foreclosed property matches your criteria, then you can decide if you want to make an offer — just be prepared for a few bumps along the way.
