When is buying a foreclosure a good idea?

Posted by Alex Narodny on Monday, September 28th, 2020 at 10:50am

When it comes to buying a home, you have several options. That includes having a new house built to your specifications, purchasing an existing home listed on the market, or opting for one in foreclosure. While some people shy away from foreclosed houses, sometimes, going this route makes perfect sense.

What Is a Foreclosure?

Briefly, banks own homes in foreclosure. Usually, this happens when the owner falls behind on payments for one reason or another. That could be due to the death of a spouse, the loss of a job, health reasons, and so on.

Once payments fall behind what the mortgage lender allows, it’ll repossess the property. At some point, the house goes to auction. With that process, the bank hopes to recoup as much money as possible.

As for buying a foreclosed house, courts and sheriff departments provide notices of when one goes up for auction. It’s also common for real estate agents to sell foreclosed properties. Working with the bank, a realtor tries to get as much money as they can while making a commission on the sales price.

Whether going to a courthouse auction or working with a real estate agent, the buyer would need to make a formal bid. Depending on the property, the price might be substantially lower than the actual value.

Reasons to Buy a Foreclosed Home

Sometimes, buying a foreclosed home is a great idea. An individual could end up with a fantastic piece of property at an incredible price.

·  Reduced Selling Price – The primary advantage of buying a foreclosed house is that buyers pay less than they would on a conventional home listed on the market. Let’s say a property is appraised at $150,000. Before going into foreclosure, the owner had an outstanding mortgage balance of $135,000. The bank might start the bidding at $100,000. If someone gets the house for that price, they’d have $50,000 in equity from day one.


·  Clean Title – When buying a conventional home, sometimes buyers discover a lien on it or that the homeowner owes back taxes. Unless resolved, that would stop the sale. However, since a foreclosed home is bank-owned, the title is always clean.


·  Loan Flexibility – Bidding on and buying a foreclosed house might require a buyer to follow a few special rules. But as far as loan options, they have several. As long as the property is in livable condition, a buyer could secure a standard loan, including FHA, USDA, and VA. On a side note… loans backed by the government are usually more affordable.


·  Repairs and Renovation – As far as the property’s condition, buying a foreclosed house could be somewhat of a gamble. Often, buyers don’t get to inspect a house until after it’s purchased. Although banks don’t typically do any kind of repairs or renovations before turning the home over to the new owner, there’s nothing saying they won’t. Especially if a property has been on the market for an extended period, the bank might be willing to budge which is ideal so that you can make sure that major systems like HVAC are in good working order. 

Is a Foreclosed Home Right for You?

As you can see, buying a foreclosed property has some advantages. Therefore, you shouldn’t automatically discount this option if you’re looking for a new home. If possible, work with a reputable real estate agent who has extensive experience with foreclosed properties.

If you go to auction, you’ll get information from the bank, but that’s usually minimal. You’ll learn the age of the home, square footage, number of bedrooms and bathrooms, and perhaps some of the amenities and features. In comparison, realtors typically tour different foreclosed homes, so they have more knowledge of their condition.

Of course, that means you have to trust your realtor to steer you toward properties that are good deals and away from those considered questionable. If possible, take your time, look at different possibilities, and research areas and neighborhoods where foreclosed properties exist. That alone will give you an idea about the crime rate, median age, and even the average price of nearby houses.

So, here’s the deal…if you find a good, foreclosed home in a great location, more than likely, you’ll come out ahead the minute you take over the deed. So, for many people, buying a foreclosed house is a good idea.


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