Pros and Cons of Buying Foreclosed Houses

05.11.2022 | Category: Homebuying

Foreclosed houses are attractive to buyers because of their lower prices. Sellers are also more motivated to get them off the market, generally creating favorable conditions for would-be homeowners. Further, it's now easy to find and acquire foreclosed properties virtually anywhere in the country,

But while it's beneficial to purchase this type of home, remember it also comes with its fair share of pitfalls and risks. We’ll lay down the pros and cons of going for a foreclosed home and a few quick tips to score a good deal.

What Is Foreclosure?

Foreclosure refers to the legal means used by lenders to seize the mortgaged property from borrowers who default on their mortgage loan. When this happens, lenders are given the right to sell the house to recover their losses. The exact process depends on the state where the home is located. In some cases, the bank or mortgage company will need to go to court to prove they own the property.

In addition, foreclosure begins when homeowners fall behind on their monthly payments, usually for three to six months. It can also be triggered by other reasons, such as failure to meet some conditions in the mortgage agreement.

Pros of Buying Foreclosed Houses

While low prices may draw interested home buyers to foreclosed homes, there are a couple of other reasons that make this choice advantageous to potential buyers.

Let's take a closer look at these attractive benefits.

Lower Price

Significant savings await those looking to buy a house in foreclosure. It is not a secret that properties in this category are often sold below their market value. Usually, banks and mortgage companies put out attractive prices to draw multiple offers – a strategy that benefits both buyers and sellers.

Here are some figures to give you an idea:

According to 2016-2021 data (The Balance, 2021), the average price of a foreclosed home ranged approximately from $93,000 to $166,000. These numbers are well below the annual national average for each of those years in which data was available.

On top of an affordable price, you can gain additional savings from discounted down payments, lower interest rates, or reduced closing costs.

Quicker Transactions

There are several approaches to buying foreclosed properties: directly from the seller, at auction, or through a lender's real estate-owned (REO) inventory. In any case, it is still much faster to close a foreclosed house compared to a non-foreclosure one.

Experts estimate that it takes 30 days on average to close a foreclosed property deal. That's much faster than the 58-day average for January 2021 mentioned in the Ellie Mae Origination Insight Report.

Potentially Greater ROI

Some purchase foreclosed properties with homeownership in mind, but others opt to invest in this market in anticipation of a higher return on their investment.

Buying a foreclosure to improve and remarket shortly after – also known as flipping the property – is one way to maximize your investment. Another option is to convert the property into a rental space and wait until its value shoots up in the marketplace before selling. Either way, you rehabilitate the asset, create value, and increase its equity.

Of course, not all foreclosures are created equal. One way to ensure you capture a good investment in your hands is to search for properties located in an area due for redevelopment. These assets should also display attributes that distinguish them from others in the local market.

Cons of Buying Foreclosed Houses

On the other hand, here are some of the disadvantages that often come with purchasing foreclosures:

No Home Inspection Before Buying

Unfortunately, most foreclosures are sold on an "as-is" basis. This means you will have to submit an offer without the benefit of a complete or professional home inspection. For this reason, you will have to rest on your intuition. Even if you check the property through a drive-by or peering into ground-floor windows, it is not as substantial as getting full access inside.

Repair and Renovation May Be Required

The property may be in disarray if it has been vacated for some time. It can also be an adverse condition if it is still occupied but poorly maintained, assuming the previous owners cannot pay for regular upkeep. In some instances, occupants may also feel frustrated because of the foreclosure. As a result, you would hear stories about people taking appliances and removing basic fixtures. Worse, some vandalize the properties deliberately, leaving them in dire need of repair.

Buying a foreclosed home includes managing your expectations and having enough money for rehabilitation. Set aside a budget of 10% to 20% of your purchase price for this purpose alone.

Competitive Market

The demand for foreclosures has soared over the past years, especially with the availability of online or remote bidding brought about by the pandemic. The increased interest and competition have caused inventory to go quickly. You're not only going head-to-head with potential occupants, investors and professional house-flippers are also after the same foreclosed properties on your shortlist.

This scenario can result in a bidding war, where many people field their offer for a bargain property, forcing its price to go up. You may have to back out if it goes beyond what your financial situation allows.

If you're considering financing options, check out how much you will have to pay monthly using our mortgage calculator.

Cash Payment Is Required in Certain Situations

Aside from the repair and restoration costs, you will have to pay a good deal of cash upfront if you choose to purchase a foreclosed house at auction. Initially, you must secure your right to bid using cash. You can also bring a cashier's check or money order to these events, anything that enables you to make a full payment right after winning a bid. Occasionally, you'll be allowed to provide a deposit first and pay the entire amount the following day.

How To Buy a Foreclosed Home

Before you decide if the pros of buying a foreclosure outweigh the cons, take time to plan and strategize your next steps. You should leverage every aid available during your property hunt.

To help you do that, here are our top three tips on how to buy a foreclosed home:

Do Your Research

Think like an investor and conduct careful research before assessing your options. If possible, look into the history of the local property – asking the neighbors or requesting a professional inspection via your real estate agent (more on this below). Check out the economic and demographic trends in the area. Go to sites like Niche and Data USA, which give you a detailed profile of almost every known locale in the country.

Work With a Reputable Real Estate Agent

Buying a foreclosed house through a real estate agent can be beneficial in the long run. First off, lenders sell their seized properties through these agents. Talk about having access to expert takes and insider information. Next, someone with a significant experience in this particular market can help you find the best opportunities for your practical and budgetary requirements. Lastly, you can maximize their familiarity with the process, and rest assured they're on your side, protecting your interest at all times.

Get Pre-qualified

You're already on your way to pre-qualification if you typed "mortgage lender near me" and found us. Getting pre-qualified means you have a ballpark figure of what you can afford once you start hunting in the foreclosed property market.

More than just a search result for "mortgage lender near me," our mortgage professionals can assist you in the pre-qualification process. We review your income and debt list and then calculate the loan amount you can use to purchase a foreclosure.

Are You Ready To Buy a Foreclosed Home?

It's good to be aware of the pros and cons of purchasing foreclosures and be equipped with practical ideas on how to buy a foreclosed home. However, these do not exist in a vacuum. You can tick them off your list while searching for a mortgage lender that keeps your best interest in mind.

With Mutual of Omaha, you can get pre-qualified and pre-approved as you enter the foreclosed real estate market. Our mortgage experts also provide a smooth loan application process to ensure a painless experience.

Reach out to us today to get started.