The Pros and Cons of Buying a Foreclosure

The Pros and Cons of Buying a Foreclosure

While browsing the real estate ads in your local paper or online, you might come across a listing that starts with the word “foreclosure” and ends with a price that looks too good to be true. How can this house possibly be priced so low? What’s the catch?

To answer the first question, foreclosure is the process by which a mortgage lender seizes a home because the borrower has defaulted on the loan. The lender then sells off the property – but only for the amount it’s owed, which is often much lower than the market price. Buying a foreclosure can be a great way to get a home at an unbeatable price, but it can also involve more work – and sometimes more risk – than a regular house purchase.

The pros and cons of buying a foreclosed home depend on when you buy it. Foreclosure is a lengthy process, and there are several different stages at which a buyer can jump in. Here’s what you can expect with the three main types of foreclosures.

Pre-Foreclosure Homes

A home is in pre-foreclosure when the owner has fallen behind on payments and has received a legal notice that the mortgage lender is about to start foreclosure proceedings. At this point, the owner still has a chance to avoid foreclosure, and recover at least some of the money they’ve put into the house, by selling it fast. Pre-foreclosure homes usually aren’t officially listed for sale, but you can find them on websites like Zillow or through the “Foreclosure Notices” section in your paper.

Pros:

  • Good Price. Because the owners have a strong incentive to sell the house quickly, they’ll be more willing to negotiate on the price.
  • Time for Research. You’ll have a chance to inspect the house and see what repairs are needed. You can also do a title search to make sure there are no liens or legal snags with the property.

Cons:

  • Subject to Lender’s Approval. If you are looking at a short sale – that is, paying less than the full amount the owner owes on the mortgage, plus closing costs – you’ll need approval from the mortgage lender.
  • Wait to Move In. The seller is still living in the house and will need some time to move out, so you won’t be able to move into your new home immediately.

Foreclosure Auctions

Once the lender has officially seized a property, it sells it at a foreclosure auction. Bidders must show up prepared to pay for the house in full, up front. Sometimes the winning bidder must make out a check for the full amount then and there; in other cases, they can leave a large deposit and pay the balance within 30 days.

Pros:

  • Great Price. Legally, the bank cannot charge more for the property than the amount outstanding on the mortgage.
  • Less Competition. Because you must pay up front, there are likely to be fewer buyers competing for the property, improving your odds of getting it.

Cons:

  • Payment Up Front. Most auctions are “all-cash” transactions, meaning they will require full payment in a relatively short period of time after the purchase. In most cases, it doesn’t matter if the funds come from you or a lender, although getting a mortgage would be more complicated as it might prevent you from being able to close quickly.
  • Immediate Responsibility. If you buy at a foreclosure auction, you become legally responsible for all liens on the property, such as back taxes.
  • Little Time for Research. You only have up to the day of the auction to inspect the house and conduct a title search.
  • Sold “As-Is”. All foreclosure homes are sold as-is, so you could be on the hook for major repair bills. The bank can’t disclose what condition the property is in, and there’s even a risk of a disgruntled homeowner damaging the property on purpose before leaving.

REOs

If the bank doesn’t think it can get a good price at the foreclosure auction, it can buy the property itself. If that happens – or if the bank just can’t find a buyer – the property becomes “Real Estate Owned by Lender,” or REO for short. Then the bank can sell this REO property at its convenience.

Pros:

  • Low Prices. Lenders are motivated to sell the property and are usually willing to negotiate on the price and other terms.
  • Clear Title. When you buy from the bank, you don’t owe back taxes or other liens from the previous owner.
  • Time for Inspection. You have a chance to inspect the house before buying.
  • Mortgage Financing Allowed. You can get a mortgage just like with any other house purchase.
  • The House is Empty. You can move in right away.

Cons:

  • Slow Process. The legal rules for foreclosures are complex. There’s more paperwork involved, and the sale may take longer than normal.
  • Sold “As-Is”. The lender won’t make any repairs unless they’re legally required. It also won’t disclose the history or the condition of the house.

How to Protect Yourself

Buying a foreclosure at any stage is even more complicated than a typical house sale. It’s important to have help from someone who knows about the process: a real estate agent who specialized in foreclosures, a mortgage lender, a lawyer, or all three.

You can also protect yourself by checking out the house in person, getting it professionally inspected if possible, and doing a title search to make sure there are no other liens on the property. If you take the right precautions, buying a foreclosure can be a way to buy the home of your dreams at a price you can afford.

 Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.