Should I Buy a Foreclosure? Pros and Cons of Buying a Foreclosed Home
Buying a foreclosed home can be a completely different experience than buying a home through a traditional sale. While there are pros like lowered cost, there are cons, like buying the home as-is. Here’s an overview of the pros and cons of buying a real-estate owned home (REO), and whether you should consider a bank-owned home in your search.
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Pros of Buying a Foreclosed Home
The first major pro is, of course, the price of the home. Generally, foreclosed homes are priced to sell. A bank now owns the property. However, the bank probably does not want to own it, and wants to make whatever money it can back. As a buyer, and in particular first-time homebuyers, this is a great opportunity to potentially save some money. If the home has gone to auction, there might be an even bigger potential for getting a good deal.
The bank wants to get their money. They might be amenable to negotiating, depending on a number of factors. If there’s competition, or homes in the area have a comparable price point, the bank might just wait for a better offer to get more money. However, if you have the money and are ready with a good offer, they may just accept it to wash their hands of the property.
Until you buy the house, a bank owns it. There are no liens or guessing who actually owns the home; if it is a true foreclosure, it’s always owned by the bank the previous owner used for the mortgage. When you purchase the home, you can rest assured it’s now your name going on the title. This also means that there is no need to kick out the previous inhabitants; the house will be vacant.
Cons of Buying a Foreclosed Home
Long Closing Time
While the bank might want to get rid of their inventory of real estate, that doesn’t mean the paperwork goes any faster. Priced to sell is one thing; wading through bureaucracy is another. This means that buying a foreclosure often results in a longer closing time as you wait on the bank. Normally, a previous owner is motivated to move out and close the home so they can either buy another home, or not pay two mortgages. The bank owning the home, however, just wants to sell it, instead of having a firm timeline. Be prepared to wait.
If you are a first-time homebuyer and have a place to stay in the meantime, this may not affect you too much. However, if you are moving and need to be out of your house by a certain date, this could be detrimental to your living situation. You may find yourself living out of a hotel for a bit.
The house is generally sold as-is. Any damage done will likely not be repaired. If there are holes in the walls, then it’s time to learn how to spackle. Cement plugging up the toilet, in a vain attempt at retaliation at the bank by the previous owners, means you need to buy a new toilet, and probably call a plumber. This makes buying a foreclosed home a risk, especially if you are not well-versed in home repair.
It’s not uncommon for foreclosures to be thought of as fixer-uppers, and as such they are often targeted by house flippers who are willing to put in the elbow grease to improve the home and make a profit on the sale. When you are just looking to buy a house to live in, the repairs that might be needed can be daunting. It’s important to hire an inspector to determine exactly what needs to be done to fix up the home, and it may be a long list depending on the attitude of the previous owner. Also know that the bank will not fix anything for you; your inspection is purely for your knowledge.
Lack of Negotiations
While some banks might be willing to negotiate just to sell inventory, others may stand hard and fast on the original price. Yes, the bank wants to get rid of the property, but they also want to get the most money possible from it. It’s best to compare with other houses in the neighborhood or nearby neighborhoods. If the market is strong in the area, the bank may not budge, especially if they are already undervaluing the home.
Going back to the as-is con, the bank will not fix anything wrong with the house. Nothing will be repaired, and they will probably not cut you a deal in order to fix it yourself. Instead, you’ll need to budget for this yourself. You are dealing with an institution, not a person, and they do not care about your situation in the least.
If a foreclosed home is on the market for more than even a few days, it could be a sign that it’s not a prime location. Foreclosed homes in a nice part of town will be snatched up quickly. You need to be ready to buy, with your finger on the proverbial trigger. Otherwise, you might be buying a foreclosed home in a less than desirable area of town.
Is It a Good Idea To Buy a Foreclosed Home?
The answer to that question is tricky. First, you have to ask yourself how much work you are willing to put into repairing any damage done to the house by the previous owners. You may get little, and there is little-to-no damage, and the previous owners were not vindictive towards the bank. Or, there could be holes, broken mirrors, leaky faucets, and more. The cost to repair, which the bank will not take into account, unlike a traditional home sale, could make the price undesirable. It might also be worth your time to look into pre-foreclosures, as well. This might save some time on paperwork.
On the other hand, a foreclosed home could present a great opportunity for a house flipper or first-time homebuyer willing to roll up their sleeves and get to work. The cheaper cost could be a great way to get into a desirable location, if you can quickly make an offer. It also helps if you know you have a place to stay while the bank trudges through a mountain of paperwork.
Buying a foreclosed home can be a good idea, but you have to know what you are getting yourself into, and be ready to accept the consequences. It’s not just a house being sold for under its actual value; it might be a home that needs repairs. It might take some time before you can move in. If you can deal with these obstacles, however, a foreclosure can be a great idea.
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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42
This post was updated September 17, 2018. It was originally published August 15, 2018.