A Guide to Buying Foreclosed Property

The PropertyClub Team
Sep 7th 2020
Buying a foreclosed property can be an excellent investment, but it also carries a high degree of risk. Here's what you need to know, including the pros and cons of purchasing foreclosures.

Foreclosed properties are one of the most misunderstood real estate actions out there. People often paint these properties with a broad paintbrush—often as a magical bargain or a scam. Truth be told, buying a foreclosed property isn’t a black and white matter. It’s a process that, if done with care, will give you a great home at a fraction of the price. 

Before you try to enter the foreclosure market, understanding what you will need to do to get a foreclosed home and the risks you take on is a must. This quick guide will give you a good idea of what you can expect.

Pros and Cons of Buying a Foreclosed Property

Like with any other real estate transaction, there will be perks and pitfalls associated with buying a foreclosed property. Here’s what you need to know about the pros and cons.

Foreclosed Property Pros

  • The prices of foreclosed properties are a fraction of what they would typically cost. If you want a cheap house, this could be the best way to do it. 
  • It’s often easier to obtain than a regular home. If you can finance it, a foreclosed home can actually have a much lower price tag than comparable homes in the same area. You might make a much larger profit. 
  • They’re often ideal for “fix and flip” properties. Since you’re already setting aside a budget for repairs, bad renovations or significant damage won’t phase you as much as it usually would.
  • In many cases, you are allowed to get an inspection. Though it might be required to buy the house without an inspection, many banks will let potential buyers get a professional inspection. 

Foreclosed Property Cons

  • Lenders often won’t finance foreclosed homes. If you have a foreclosed home that you might qualify for, your lenders might still reject it if it’s appraised below value or deemed uninhabitable by the bank.
  • The competition in high-demand regions can be fierce. It’s not unusual to hear of people going to full bidding wars over areas that remain in high demand. 
  • You can never get a seller disclosure for your foreclosed home. Since no one from the bank lives there, you cannot get a disclosure. This can lead to a lot of issues that you might not be able to pinpoint from a brief inspection.
  • There can be delays with the bank. The closing time for a foreclosure is unpredictable with most situations, simply because of the chaos it can spark in a bank’s paperwork.
  • Many (if not most) foreclosures will have some damage due to neglect or vandalism. With some houses, this could be as simple as having weeds or a small roof repair. In more extreme cases, foreclosed-upon families may enact revenge by doing whatever they can to decimate the house they once loved.

How To Buy A Foreclosed Property

In a lot of ways, buying a foreclosure is similar to getting a regular home. Here’s what you would have to do:

  1. Make sure you have a pre-approval letter and a real estate agent before you move forward. You need both to start. When hiring an agent, look for someone who has some experience with foreclosures, since the process can be a little tricky. If you are buying cash, you don’t need to get a pre-approval letter. 
  2. Work with your agent to find a foreclosed home you like. Your agent will help you hire an inspector and appraiser that your lender trusts. If all goes well and the home’s issues are good, you will need to go to the next step.
  3. Find homes with comparable costs, and then make an offer. With this, you will need to rely on your agent’s advice to make sure you have a reasonable bid. If your bid is not accepted, you can make a counteroffer. Keep contingencies at a minimum and expect rapid bidding.
  4. Once the offer is accepted, expect to pay for it as-is. You cannot request repairs when you are buying a foreclosed home. 

Is It Worth Buying A Foreclosed Property?

Buying a foreclosed property is not like a regular property. When you buy a standard home, you have many safety measures and protective laws that prevent you from a loss. Foreclosures are best taken as a risky endeavor. 

Whether or not you should buy a foreclosure all depends on whether or not you are looking to “fix and flip,” as well as how much risk you are willing to take. If you’re flipping houses, it may make sense to get a foreclosure simply because you’re looking to do a full overhaul. The risk just won’t matter as much.

On the other hand, if you are hoping to live in your house as-is, a foreclosed property might be too risky. Most people who are looking for a massive discount have to remember that a typical foreclosed property can easily require thousands of dollars in repairs. Should you be looking at a home on a shoestring budget, tread carefully. It could be a significant loss!

Our Final Take

If you are in the market for a foreclosed property, then you have a lot of research to do before you make an offer—not to mention a lot of careful planning. No other type of real estate quite lives up to the phrase “caveat emptor” the way that foreclosures do. 

The risk of getting a bad hand with a foreclosure is real, and horror stories can be found on almost every corner of the internet to prove it. However, with great risk comes the potential for great reward. Knowing this, you shouldn’t discount the idea of buying a foreclosure entirely. That’d be throwing out the baby with the bathwater!

Every foreclosure transaction is going to be different, and if you’re wondering whether it’s right for you, you need to take things on a case-by-case basis. With careful inspection, a little research, and a little extra financial padding, you should be able to make the right decision for you.