What to Know About How to Buy Foreclosed Homes

Key Takeaways:

Buyers of foreclosed homes may find properties well below market value, but they should be mindful of unforeseen maintenance costs and other potential risks.
Not all foreclosure sales follow the same process. There are important differences between auctioned homes, bank-owned or REO home sales, and preforeclosure home sales.
urchasing foreclosed homes can be logistically complicated, and experienced realtors, lawyers, and other real estate professionals can help you navigate the process.

Why Buyers Are Interested in Foreclosures

A foreclosure sale can present a financial opportunity, given the right conditions. Here’s a closer look at the potential benefits of buying foreclosed homes:

Lower than average sale price. Lenders who repossess a house generally want to sell the property as quickly as possible to recoup costs. This means foreclosures are often priced below the cost of comparable properties in the same area.
Flipping potential. The possibility of real estate savings on foreclosed properties make them attractive to investors and flippers. Buyers can purchase a foreclosed property at a low price, perform some structural or cosmetic updates on a budget, and then resell the home for a profit.
Expedited closing. Purchasing an “as-is” property directly from the lender can sometimes mean that you dodge common scenarios that result in real estate closing delays. Other delays unique to the foreclosure process are possible, but experienced and savvy buyers may be able to pick up a new property quickly.
Limited competition. The risks associated with foreclosures and uncertainty about the foreclosure process can dissuade some potential buyers from exploring this corner of the real estate market. Less competition makes bidding wars and offers beyond the asking price less likely.

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Exploring the Different Types of Foreclosures

There are a few types of foreclosure sales. The specifics of the sale process can depend on who the seller is, the nature of the property, and other conditions, but foreclosures can usually be sorted into the categories outlined below.

Preforeclosure

A property is in preforeclosure when the homeowner has already defaulted on their mortgage but the lender has not yet initiated foreclosure proceedings. The homeowner is typically motivated to sell in order to pay back the lender and avoid the financial ramifications of foreclosure. Preforeclosure sales sometimes result in a short sale, which is when the home is sold for less than the balance on the mortgage. Homebuyers who successfully negotiate a short sale can acquire a property for well below market value, but short sales require the lender’s approval.

Auction Sales

Once a property is in foreclosure, one way in which it may be sold is at public auction. The lender is typically disallowed from turning a profit at a foreclosure auction, but bidding may start below the amount of the outstanding mortgage balance to entice bidders. If the property sells for beyond the price of the mortgage balance, surplus funds may go to the former homeowner.

Foreclosure auctions may invite more risk. Home inspections aren’t always permitted, so bidders may have little idea of the condition of the property. Also, auctions often require cash payments, so bidders must have ready access to substantial liquid funds to make a purchase.

Bank-Owned or REO Foreclosures

If a property doesn’t sell at a foreclosure auction, the mortgage lender can list the home for sale via traditional means. This is referred to as a bank-owned or real estate owned (REO) property.

Government Foreclosures

In some cases, federal agencies or administrations, such as the VA, FHA, or USDA, insure home mortgages. If a homeowner with a government-backed mortgage defaults, the government pays off the lender and repossesses the property. The government can then resell the home to qualified buyers.

Key Advantages and Challenges of Buying Foreclosures

With some real estate savvy and a bit of luck, investors in foreclosed properties may find themselves in an advantageous financial position. But risks and challenges abound. Here are the pros and cons of buying foreclosed properties.

Advantages:

You can buy a property for well under market value. The best deals are to be had if you can negotiate a short sale in preforeclosure or put in a winning bid at auction, but even REO sales and sales through federal channels can offer substantial savings.
If you have the funds to buy a home and invest in some updates, you can turn a profit by flipping foreclosed properties in desirable locations.
The pool of potential buyers is smaller in the foreclosure market, and sellers are usually motivated to offload properties quickly, so buyers often have the edge.

Challenges:

Lenders don’t typically disclose details about a property’s condition at an auction or in an REO listing, and inspections aren’t always permitted. Homes are sold “as is.” This means the buyer is not necessarily fully informed, and may be investing in a property that requires a substantial amount of work. Unless you’re prepared to buy a fixer-upper, you should approach foreclosure sales with caution.
If you buy a home at auction, you may be responsible for any back taxes or liens.
In some cases, foreclosure sales can be logistically, legally, and even emotionally complicated.

Depending on the circumstances, a foreclosure sale can be a roll of the dice. A seasoned real estate investor with deep pockets may be comfortable with that, but first-time homebuyers should proceed with caution.

Why Work With Specialized Real Estate Professionals?

If you’re interested in purchasing a foreclosed property but need help in navigating the process or mitigating the risks, you can connect with a real estate professional who specializes in foreclosure sales. An experience realtor can:

Help you manage paperwork and guide you through the buying process.
Guide you on how to find foreclosed homes that may be not yet listed or on platforms that are unavailable to you.
Monitor the housing foreclosure rate to give you a better idea of possible inventory.
Recommend other real estate and home professionals who can help you before or after closing, such as contractors, inspectors, and attorneys.
Advise you on the best time to buy or sell your home to maximize your savings or profit.

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Frequently Asked Questions

Are foreclosed homes always cheaper than traditional sales?
Foreclosures are not necessarily cheaper. They are often priced lower than comparable properties in the area, but buying a property “as is” leaves you vulnerable to hidden costs. Unpaid taxes, liens, or necessary renovations or repairs could quickly erase any savings you earn from the sale price.
Can I get a regular mortgage for a foreclosed property?
Foreclosures may be eligible for regular mortgages, but it depends on the nature of the sale. REO or government-owned sales, for example, may allow for a mortgage, but an auctioned property may require a full cash payment upfront.
How do I find reliable listings for foreclosed homes?
You can find some foreclosures listed on standard MLS platforms (think Zillow, Redfin, etc.). The U.S. Department of Housing and Urban Development maintains the HUD Homestore, which can be a good resource for government-owned homes. Fannie Mae, Freddie Mac, and the USDA and VAmay also list homes.
You can also peruse foreclosure-specific listing services or look for public auction notices in your local government offices or on social media.
Is it safe to buy a foreclosed home at auction?
Buying a home at auction can be risky. A thorough inspection and review of public disclosures regarding a home’s condition should be items on every homebuyer’s checklist, but you may not have the opportunity to adequately evaluate a property that is selling at auction. As a result, you run the risk of buying a money pit.
Will I be able to inspect a foreclosed property before buying?
Depending on the type of sale, you may be able to inspect a foreclosed property before closing. REO sales and government-owned sales, for example, often allow for inspections. At an auction, however, inspections may be disallowed, or there simply may not be time for one.
What are common expenses after purchasing a foreclosed home?
Expenses following the purchase of a foreclosed home could include structural repairs and renovations, appliance repairs and replacements, back taxes or liens that the previous homeowner did not pay, and typical real estate closing costs.
You may be able to mitigate some expenses if you purchase a home warranty at closing. Liberty Home Guard’s comprehensive protection could keep you from paying out of pocket if an essential home appliance or system breaks down. Learn more by calling (833)-543-9576.