Although there are fewer foreclosed homes on the market today than there were in the years immediately following the financial crisis, there are still many to be found. While there are some benefits to buying a foreclosed home, the process isn't as easy as a standard real estate transaction. Here's an overview of the process, as well as some words of caution before you start your home search.
Why buy a foreclosed home?
For the most part, consumers are interested in buying foreclosed homes -- also known as "bank owned" or "REO (real estate owned) homes" -- for the potential to get good deals. Because foreclosures are generally sold below market value, buyers can get more house for their money than they would otherwise. In fact, according to a report from Zillow, foreclosed homes sell an average of 7.7% below fair market value.
For investors, foreclosed homes often present the opportunity for "fix and flip" profits. Since many foreclosures are in substandard condition, there's a big opportunity for investors to come in with cash and scoop up homes to rehabilitate.
How to buy a foreclosed home
There are two main ways to buy a foreclosed home: at auction or through a real estate listing.
Once a bank takes possession of a property, it goes to a "public foreclosure auction," during which the bank attempts to sell the property to the highest bidder. Auctions can go rather quickly, and buyers may or may not be able to inspect the property before bidding, so there can be considerable risk involved in acquiring foreclosed homes at auction.
If you aren't experienced in foreclosure auctions, you should attend a few to observe the process and determine the requirements to bid. Many auction firms require buyers to bring a certified check for a deposit, among other requirements.
After the auction, if a property doesn't sell, it will be listed for sale in the same way most homes are listed. You can browse listed foreclosures on websites like Zillow and Realtor.com. Buyers can then shop these listed foreclosures and place offers.
Things to keep in mind
Before you attempt to buy a foreclosed home, there are a few things you need to know.
First, once you make an offer on a foreclosed home, you should be prepared for the process to take longer than a traditional home sale. Instead of submitting an offer to an individual seller, you're submitting an offer to a bank. Many banks have lots of foreclosures listed at any given time and have multiple layers of approval through which your offer must pass. So be prepared to wait.
Further, an inspection is extremely important when buying a foreclosed home, particularly if the property has been vacant for some time. Many foreclosed homes have problems that are tough to detect with an untrained eye, such as mold buildup in the walls or broken pipes. As a rule of thumb, if you're bidding on a home at auction and you can't inspect it first, you should assume a worst-case scenario before placing a bid.
Even if an inspection goes well, be prepared to invest a considerable amount of money in repairs. The former homeowners might have neglected maintenance issues, or even intentionally damaged the home when they knew they were facing foreclosure. It's not uncommon for foreclosed homeowners to sell valuable items, such as appliances, before the bank takes the home.
For really good foreclosure deals, you're likely to face stiff competition, especially from buyers who can purchase properties in cash. So, if you're planning to obtain a mortgage, it can be especially tough to take advantage of the best deals.
Foreclosed homes are more likely to run into title issues, such as uncovered liens on the property that can further delay and complicate the transaction.
In addition, the foreclosure process can be tricky. Unless you have a strong real estate background, I would highly recommend hiring a real estate professional with extensive experience in foreclosures. It's possible to buy a property in a standard sale without professional help, but it's not a good idea when buying a foreclosed home. Also, you may run into legal issues when dealing with foreclosures, so be prepared to consult a real estate attorney.
Is a foreclosed home right for you?
So long as you have a somewhat flexible time frame for the purchase of your next home, and you're willing to deal with all of these issues, a foreclosure could be a great way to get into your next home at a cheaper price than you could obtain otherwise. Do your research before placing an offer, and make sure the deal you get is worth the potential headaches.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Zillow Group. The Motley Fool owns shares of Zillow Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.