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If you’re in the market for a house—either to live in yourself or as an investment—a foreclosed home might seem like a bargain. In many cases it is possible to buy a house that’s in foreclosure for substantially less than you’d have to pay otherwise. However, foreclosed properties often have costly problems that can make them much less of a bargain than they first appear.
Here is what you need to know to protect yourself if you’re considering a foreclosed property, including five big pitfalls to avoid.
Key Takeaways
- Foreclosed homes are often available at substantial discounts from other properties.
- However, they may be in poor shape and need costly repairs.
- In addition, there may be legal complications, such as liens on the property.
- Many foreclosed homes are sold in all-cash deals, but mortgages can also be available for buyers who need one.
1. Problems With the Property
Foreclosed homes can have multiple problems, both physical and legal, some of which may not be immediately visible. They may be in poor condition (see next section), fail to meet current local building codes, or have unresolved liens that you’ll have to deal with.
For example, the home could have tax liens on it, due to the previous owner’s failure to pay their property taxes. The owner might have made repairs or additions to the property without obtaining the proper permits. They might have left behind unpaid association dues that you’ll now be expected to make good on.
One way to protect yourself from some of the legal issues is to hire a title company to do a title search before you commit. It should turn up any unpaid liens on the home.
Another potential problem: Some states have redemption laws that allow someone whose home has been foreclosed on to buy it back within a certain period. In a handful of states, they can even buy it back after someone else has purchased it.
2. Maintenance and Condition
Foreclosed properties are often in poor condition compared with other homes. The former owner might have allowed the home to fall into disrepair, either because they couldn’t afford to keep up with the basic maintenance or because they were simply neglectful. Some owners, angry over the foreclosure, may even have done deliberate damage before moving out.
Simply sitting empty for a period of time isn’t good for a house, either. It may have attracted mice or other vermin, with no one around to notice and call in an exterminator. Or it may have become an easy target for vandals or for criminals looking to tear out its copper wiring or other valuable materials.
A vacant home might even have attracted human squatters, and they could still be in residence.
Warning
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).
3. No Seller Disclosures
Foreclosed homes are typically sold “as-is.” That means the seller, such as a bank, isn’t obligated to disclose any defects in the way that a normal seller, who has actually lived in the home, is legally required to.
You, the buyer, are taking the risk that there may be costly issues with the property that you won’t know about until you own it. Because of that, it is an especially risky proposition to buy a foreclosed property that you haven’t at least visited first. As a further precaution, it is worth engaging a professional home inspector and reading their report carefully, time permitting.
Freddie Mac, the government-sponsored enterprise that buys and packages mortgages for resale on the secondary market, suggests paying particular attention to the home’s:
- Foundation and structure
- Plumbing
- Electrical
- Roofing
- Heating, ventilation, and air conditioning systems
4. Problems With the Purchase
In addition to any potential problems involving the home itself, there can be complications in the purchase process.
For example, while banks are often eager to unload foreclosed properties as quickly as possible, there may be a considerable amount of paperwork involved in closing the deal.
Obtaining a mortgage or other financing to buy a foreclosed home can be more difficult, as well, because of the added risk to lenders. Although many foreclosure sales are cash-only deals (for buyers who happen to have the cash at hand), mortgages can be available, especially through government programs.
The Federal Housing Administration’s Section 203(k) program, for example, facilitates loans from private lenders that can not only cover the purchase of the property but any necessary repairs.
If you’re planning to use a mortgage to purchase a foreclosed house, it’s a good idea to get pre-approved by a lender before you even pick out a property.
5. Competition
Depending on the state of the housing market at the time and the availability of foreclosed properties, you may face competition from other would-be buyers.
This can not only limit your ability to bargain down the asking price, but require you to make a faster decision than might be ideal.
Professional investors with wads of cash can be at an advantage here, but getting pre-approved for a mortgage if you need one, as mentioned above, will help.
How Can I Buy a Foreclosed Home?
Homes that are in the process of foreclosure are sold in several different ways, depending on how far along the process has gone. In a preforeclosure sale, you’ll be dealing with the homeowner and their real estate agent. Once the foreclosure is complete, the property may be put up for public auction or, if it fails to fetch an adequate bid, sold directly by the lender as what’s referred to as real estate owned (REO). Auctions tend to be all-cash deals.
Should I Buy a Foreclosed Home?
Buying a foreclosed home involves tradeoffs. You’re likely to get a home for far less money, but it’s also apt to come with issues that will require additional investment or labor on your part. A good question to ask yourself is whether you have the time, skills, and patience to make it work.
What Does Foreclosure Mean?
Foreclosure is a multistep process that begins when a homeowner is unable to pay their creditors. Those creditors can then invoke their legal rights to take ownership of the home and sell it in order to recoup some portion of what they are owed.
Can I Use a Mortgage to Buy a Foreclosed Home?
With the exception of most auction sales, you can often use a mortgage to buy a foreclosed home, assuming you can get one. As with any other home purchase, the lender is likely to require an inspection and a professional appraisal to make sure that you aren’t paying more than the home is worth in its current condition.
The Bottom Line
Foreclosed homes are often advertised as great bargains, and sometimes they actually are. However, you’ll want to go in with your eyes open because they can also have physical defects or legal complications that will make your life difficult. In particular, it’s worth comparing what you’d have to pay for a home on the regular real estate market versus one in foreclosure to make sure you’re being adequately compensated for any extra hassles.
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