Purchasing a home in foreclosure can mean getting a great deal. After all, when a homeowner defaults on their mortgage or fails to pay property taxes, the lender wants to get rid of the property as fast as possible, even if they don’t recoup all their losses.
However, there are significant risks involved with buying a foreclosed home. A successful transaction requires patience, flexibility, and know-how. Learn the pros and cons of buying a foreclosure at different stages of the process to help you decide if the risk is worth the reward.
Buying a House in Pre-Foreclosure
This stage occurs after the homeowner misses months of mortgage payments but before the lender initiates foreclosure. It results in a short sale, where the lender agrees to let the homeowner sell their property for less than the outstanding mortgage amount. All proceeds go to the lender, helping them cut their losses compared to pursuing a full foreclosure.
Pros
- Bargaining power: At this stage, the seller and lender are actively trying to avoid foreclosure, so they may be motivated to make concessions on the price.
- Knowledge of the property’s condition: The seller must provide a complete history of the house, including a title search and property inspection, just like a normal home sale.
- Flexible financing: The buyer can finance the purpose with a regular mortgage. The seller may even be willing to work out a lease-purchase agreement or mortgage assumption.
Cons
- Higher price: Early in the foreclosure process, the home price may still be around fair market value.
- Lack of certainty: It may take a long time to negotiate a short sale with the lender. During these months, the homeowner may rectify their situation, causing the sale to fall through and wasting all that time and effort.
- Complicated negotiations: While existing liens, second mortgages, and unpaid taxes aren’t the buyer’s responsibility in a short sale, these issues could complicate the purchase and increase the selling price.
Buying a House at Auction
If the seller is unable to get their finances in order, the lender auctions off the property to recoup their losses. The lender isn’t allowed to profit from this, so the bidding starts no higher than the outstanding balance and fees.
Pros
- Lower price: This is when foreclosed properties start selling for substantial discounts.
- Faster timeline: Buyers don’t have to spend weeks or months negotiating with the lender and other involved parties.
- Less competition: Auctions draw a lower amount of competition than any other stage of foreclosure.
Cons
- Cash offers required: Most auctioned homes are cash-only, which explains why fewer people participate.
- Lack of knowledge: The as-is nature of a foreclosed home means the bank doesn’t disclose the property’s history or condition. Often, inspections aren’t allowed, and the buyer is responsible for any liens or back taxes. This underscores the importance of a comprehensive title search and title insurance.
Buying a House in Post-Foreclosure
If a home doesn’t sell at auction, it becomes a real estate-owned (REO) property. The lender can now sell it directly on the market or at a later REO auction.
Pros
- Even lower price and greater bargaining power: At this final stage, the lender is eager to get the property off the books. Because of this, they may make concessions on the price, down payment, closing costs, escrow length, and more. Some government-backed mortgages may also offer price-reducing programs to owner-occupier purchasers.
- Flexible financing: The buyer can use traditional mortgage financing to purchase the home.
- Knowledge of the title: The buyer knows about any liens or back taxes. It’s also possible to schedule all the usual inspections.
Cons
- Lack of condition knowledge: The property is still sold as-is, so the lender doesn’t disclose the property history or condition.
- Higher potential for problems: There may be a good reason the home didn’t sell during pre-foreclosure or at auction.
General Pros and Cons
The common goal when buying a foreclosure is to save money. This is true whether you’re a first-time homebuyer, a more experienced homebuyer, or a fix-and-flip investor. But is buying a foreclosed home more trouble than it’s worth? Here are more downsides that apply whether you buy during pre-foreclosure, auction, or post-foreclosure:
- Fluctuating prices: Supply, demand, and other real estate market conditions influence the price of foreclosures, so you may not always strike a good deal.
- Potentially poor property condition: All foreclosures are sold as-is, so don’t expect the lender to pay for repairs, even if the home is leaky, moldy, or vandalized. Depending on what stage in the foreclosure process you purchase the home, you may or may not know its condition when you sign the contract.
- Squatters: Getting the previous owner to leave can be challenging. Sometimes, buyers propose a cash-for-keys deal, paying the occupants to go peacefully.
- Right of redemption: The former owner has the right to reclaim their property if they come up with the money within a set period after the sale. If this happens, you must turn around and sell the property right back.
- No time to dawdle: Lenders will sell a foreclosure to the first qualifying bidder, so you must act fast if you want the house. This means there are no bidding wars, but you don’t have much time to consider your decision.
Apply for a Mortgage
Buying a foreclosed home isn’t right for everyone. Your decision should depend on your risk tolerance, flexibility, and budget. Whether you opt for a foreclosure or a more conventional property, Financial Concepts Mortgage offers the home loans you need to fund your purchase.
We are Oklahoma’s premier mortgage lender, offering competitive rates and a stress-free application process. As a locally owned mortgage bank, we provide in-house loan origination, processing, underwriting, and closing to keep your information private and secure. To begin the pre-approval process, please call us at (405) 722-5626 or apply online today.