Is It a Good Idea to Buy a House in Foreclosure? The Pros and Cons

Table of Content

• Macon, Georgia real estate market: Stats & trends for 2022
• Reasons Buying a Foreclosure Could Be a Bad Idea for You
• Is It a Good Idea To Buy a Foreclosed Home?
• Bottom Line: Should You Buy a Foreclosed Home?
• How to Buy a Foreclosure: A Guide for Landing Foreclosed Deals
• Government-Owned Properties
• What is the difference between pre-foreclosure and foreclosure?

Most of these homes are sold as-is, and the price reflects that. And if you’re buying from the previous homeowner in a pre-foreclosure situation, you have a lot of bargaining power, along with a motivated seller who wants to sell the home fast. Even after a lender has taken possession, they’re still looking to move the home along to its next owner quickly, which can also mean a more reasonable price.

They may have gotten behind on mortgage payments due to unemployment, financial or health problems, and unfortunately, this sometimes leads to malicious property damage. Foreclosure investors have reported showing up to homes sabotaged by previous owners. Actions like these will contribute to the overall cost the investor has to cover.

Macon, Georgia real estate market: Stats & trends for 2022

Besides paying mortgage insurance, borrowers typically pay interest rates that are a quarter of a percentage point higher than those on conventional loans. They may also have to fork over one or two points—upfront fees that are each worth 1% of the principal amount. Properties that do not sell at auction revert back to the bank. Finding foreclosures can be rewarding, yielding diamonds in the rough or real-estate fortunes sold below market value.

You need to be ready to buy, with your finger on the proverbial trigger. Otherwise, you might be buying a foreclosed home in a less than desirable area of town. Going back to the as-is con, the bank will not fix anything wrong with the house.

Reasons Buying a Foreclosure Could Be a Bad Idea for You

Although the price may be great, the level of risk is also high when you purchase a foreclosure through an auction. The pros are the chance to be exposed to otherwise unaffordable real estate markets at a lower cost and less competition. The cons are that there could be hidden renovation costs or the home might have issues relating to the previous owner or have a lien outstanding against it. The biggest risk is the fact that you may not be able to tour the property in depth beforehand.

That number was down from 15.5 percent in 2016 and a recent high of 38.6 percent in 2011. Given all the complicating factors involved, it behooves buyers to consult a real estate agent before going all in on a pre-foreclosure home. Clever gives you access to agents who assess your needs and give you the right advice based on prevailing market conditions. Visit our website to learn more about how you can buy your next home at a great price.

Is It a Good Idea To Buy a Foreclosed Home?

Buying a foreclosed home can be a good idea if you have the cash to bid and the patience for repairs. You might want to look into 203 loans, which could be an option if the home isn’t in good shape. With this type of loan, you can include the cost of your repairs in your total amount borrowed, so you’re not stuck with a structure that isn’t livable.

When it comes to REO properties and short sales, you’ll have more leeway to negotiate. There is a certain level of risk to buying a foreclosed property. However, by understanding how to buy a foreclosed many investors find that the reward far outweighs any potential risk.

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With short sales or bank-owned (also called real-estate-owned or REO) properties, you can finance the purchase with a mortgage. Wells Fargo says approximately 60% of its foreclosed homes are purchased with financing. It is at foreclosure auctions that paying in cash is usually the rule. Is when the ownership of the house transitions from the homeowners to the bank.

Some foreclosures sell for prices up to 15% lower than the average in their neighborhood. Provided the renovations needed aren’t too out there, this can lead to a good financial windfall for the investor. A short sale occurs when the homeowner sells a home for less than what they owe on the mortgage because the value has declined. The homeowner still owns the home so you work through their REALTOR® or other real estate agent. Try to find a real estate agent versed in the complexities of the foreclosure market.

Bottom Line: Should You Buy a Foreclosed Home?

The Section 504 Single Family Repair program offers loans for repairing and upgrading homes in rural areas. The loans are for very low-income people who cannot obtain bank financing. A bank may take several months to respond to a short-sale offer, so the process can take considerably longer than a traditional purchase. In these cases, the home is likely to be underwater, meaning that it is worth less than the outstanding mortgage balance.

While you’re looking at foreclosed homes, get pre-approved for a mortgage and learn what your down payment will need to be. There are not many traditional buyers looking for a foreclosed home. Traditional buyers are more likely to buy conventional homes in their area. This competition-free environment means that you'll have less stress and pressure when bidding on a foreclosure property.

No doubt, some investors can realize tremendous savings when buying foreclosure properties. Here are five reasons buying a foreclosed property may not make sense for you. In a short sale, the owner’s lender has to approve the deal, and that can delay closing. Serious damage found in the house can result in a lower home appraisal, which may affect the buyer’s ability to secure a loan. Some lenders won’t lend below a certain dollar amount, because the profit potential on a lesser loan isn’t worth the risk. If you’re able to buy a house for far below its estimated value, you’ll pull in a massive return on your investment.

This way you'll have an idea of what costs could be needed.” — Brad, MBA, founder of 401HomeBuyers, a reputable house-buying firm. Buying a foreclosed home can unlock the potential for major cash flow. Foreclosed homes often sell for below their market value making them a great investment for buyers that are able to buy low, fix repairs, and sell high. Real estate professional, Luke Smith, adds that, “the banks often get flooded with inventory so they are willing to negotiate. This short timeline mixed with a need to pay back the bank encourages homeowners to sell their home for a low price in hopes that the home will be purchased quickly.

Government-Owned Properties

If possible, get professional help from real estate agents and other industry experts. SimpleShowing may come in to offer the professional help you need to buy a foreclosed home. The former owners most likely took out loans to repair or improve their home, and they didn't pay off. If you decide to move in any way, these lien holders will probably come after you since they won't be able to collect from the previous owner anymore. Because foreclosures are sold in auctions, you don't necissarily have to pay a realtor or any other fees typically involved with purchasing an ordinary house. Some homeowners have no incentive to maintain the home’s condition when they know they’re going to lose their property to foreclosure.