Should You Buy a Foreclosed Home?

You might snag a great deal, but there are risks involved.

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Whether you're looking to buy a home to live in, rent out for income, or flip and sell, you may be tempted to buy a foreclosed home or REO property.

But is it a good idea? Should you buy a foreclosed home? It takes some background knowledge to find the answer.

Here's how buying a foreclosed home works. After a homeowner fails to make payments, a bank forces the sale of the home. The bank generally tries to sell the property via a foreclosure auction to recoup its money quickly. If that fails and the lender takes the property back, it becomes an REO, or real-estate-owned, property.

For this discussion, we'll lump foreclosures and REO properties into the same category.

There are pros and cons to buying a foreclosed property, so you'll need to weigh them carefully as you make your decision. Here are some of the upsides you might enjoy when you buy a foreclosure. 

Advantages of buying a foreclosed home

We'll start with the benefits. Many people buy foreclosed homes for good reasons. Let's take a look at some of those reasons.

1. A low purchase price

One benefit of buying a bank-owned property is snagging a great deal. Lenders are eager to unload these properties and recoup their money, so you might manage to negotiate a foreclosed property's purchase price down and pay less than you normally would for a similar home.

2. The opportunity to buy in a neighborhood that's otherwise out of reach

When you're buying a home on a limited budget, foreclosures offer a chance to get into a neighborhood you otherwise couldn't afford. That's important if you have children and are looking to buy in a specific school district or want amenities that come with living in a particular town. 

3. A chance to capitalize on seller concessions

Buyers often incur closing costs when they purchase a property. When you buy a foreclosed home, you can sometimes get the lender to cover your closing costs or make other financing concessions that make the property more affordable.

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Disadvantages of buying a foreclosed home

On the other hand, there are several drawbacks you might encounter when buying a foreclosure. Here are a few you should know about.

1. You'll need cash if you're buying a foreclosure at an auction

When you buy a foreclosed home at an auction, you can forget about financing that purchase with a mortgage -- auction purchases need to be paid for in cash.

Granted, you don't necessarily need to come up with the entire purchase price on the day of the auction. You might just need to make a down payment. But you'll need to produce the rest of the cash shortly after the fact. This restriction could limit you to properties that don't actually meet your needs or result in cash-flow issues.

2. You may need to buy the property as-is

The previous owners of foreclosed homes often don't do the best job of maintaining them. Homeowners who become delinquent on their mortgage payments tend to have cash-flow issues, so their properties are commonly left in disarray. 

Furthermore, banks that reclaim foreclosed homes rarely make repairs. When you buy a foreclosure, you're getting that property as-is. And although a home inspection will reveal any glaring issues, you'll need to fix them on your own dime. Rack up enough repairs and the savings from snagging a lower purchase price might be wiped out.

Of course, this assumes you're not buying a foreclosure at an auction. In that case, you won't get an opportunity to have an inspection done, increasing your risk of taking on more costs.

3. Your closing may be delayed

Although lenders try to unload foreclosed properties quickly, the closing process can be lengthy. Banks often have backlogs that delay closing. If you need to close on your purchase quickly -- say you're hoping to move your family in before the start of a new school year -- you may want to think twice about buying a foreclosed home. 

Should you buy a foreclosed home?

Before you make a decision, consider your appetite for risk and how you plan to use the property.

It's one thing to buy a foreclosed home as an investment you can flip and sell at your convenience. It's another thing to buy a foreclosed home for your family to live in.

Finally, if you buy a foreclosure outside of the auction process, consider hiring a real estate agent who's familiar with the market. That way, you'll be more likely to get a good deal.

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