When is foreclosure a good idea

Because foreclosures are often terrific bargains, they are popular with real estate investors looking to use them as rental properties or flip them for a quick profit. Competing with these investors, many of whom have access to significant credit and can put down extra-large down payments or even purchase properties outright for cash, can be challenging for first-time homebuyers.

If that means you, you're not necessarily out of the running for a foreclosure purchase. But to compete with investors, you'll need to lay some groundwork to document your ability to close the deal. You'll also need to be careful and decisive about choosing a property you likely won't have much time to size up before you make a bid. To fully understand what you may be getting into with a foreclosure purchase, it's helpful and sometimes essential to work with a real estate professional with foreclosure experience.

It's also crucial to understand that foreclosure typically follows a timeline, and that purchasing opportunities and procedures differ during each stage in the process. The duration of each stage in the timeline may differ according to circumstances and state or local laws, but they typically occur in in this order:. The main benefit of purchasing a foreclosed home is savings. Depending on market conditions, you can purchase a foreclosed home for considerably less than you'd pay for comparable, non-foreclosed homes.

The main risks come from the degree to which a foreclosed property can be a mystery to the buyer. Foreclosed homes are sold in "as-is" condition, and are typically unavailable for a walk-through before purchase. Foreclosures may have sat unoccupied, without heat or air conditioning, for weeks or months prior to sale, and past owners may have neglected or even vandalized them.

If you succeed in purchasing a foreclosed home, you'll likely need some cash or available credit to get the property to move-in condition. Do-it-yourselfers may see this as a golden opportunity for savings, but less-capable or less ambitious homebuyers might consider putting that repair budget toward a down payment on a more conventional purchase.

Where to Find Foreclosed Houses The following resources can help you find foreclosed properties for purchase. Real estate professionals in your area may know of additional resources. Think buying a foreclosure may be the right choice for you? Follow these steps to ensure the process goes as smoothly as possible. Secure a Preapproval Letter A mortgage preapproval indicates a lender has reviewed your financial status and agreed to issue you a loan up to a set amount, with a repayment term and interest rate based on a specific down payment.

Preapproval attests to your ability to finance a purchase within the specified price range, and having one is practically essential when you're competing with cash buyers. Plan on spending a fee of several hundred dollars for each preapproval, and be aware that a preapproval letter is typically only good for 60 to 90 days. Specific financing terms may change if interest rates increase or your income or credit score changes before you finalize your loan application on a specific purchase.

If you're not happy with the terms of your preapproval, take steps to improve your credit score and reduce your debt. With no light, it can be hard to see what you are buying in some rooms, particularly basements and windowless bathrooms. A small leak under the kitchen sink can lead to a mold problem, and a roof leak or burst pipe can lead to major water damage.

With no one around to take care of issues as they occur, small problems can quickly turn into big problems, and big problems can turn into disasters. If the previous owner couldn't afford the mortgage payments, then you can bet they also could not afford to repair leaks, termite damage, a broken garbage disposal, or anything else. Depending on the climate where the home is located, the lawn and landscaping may be totally dead or extremely overgrown. Banks usually do not pay for gardeners to maintain the yard of a foreclosed home.

Sometimes foreclosed homeowners are locked out of the property before they can move their belongings and, in some cases, they do not take everything with them. Many real estate-owned REO properties contain furniture, trash, clothes, and other items that you will be responsible for disposing of when you become the property owner. Damage is not uncommon in foreclosure properties, and when houses are not lived in, it is easy for them to fall into disrepair from neglect. In extreme cases, it may be caused by vandals or even the former owner.

When a property sits vacant, especially if it is in a moderate- to high-crime area, new owners may have to contend with graffiti, broken windows, and other damage.

Broken windows can be common in REOs for several reasons. As mentioned previously, vandalism could be a cause. Also, when banks lock out owners while taking possession of the property, the former owner may break a window or door to retrieve belongings. In rare or extreme cases, previous owners may also purposely inflict damage at the bank's expense by putting holes in walls or tearing off baseboards and crown molding.

The previous homeowners might remove items of value from a foreclosed home, including appliances, fixtures, doors, copper pipes, and more. Anything that the homeowner does not take might be taken by thieves.

Either way, many bank-owned properties are missing things that generally come with seller-owned properties. Despite all of these potential problems, foreclosures can still be a good deal. If you are willing to fix issues that most people don't want to deal with, then you can purchase a home at a significant discount. However, you may encounter additional problems when buying the property and improving it to move-in condition. Buying a home from a lender has its issues as a result of the increased level of bureaucracy and the limited transparency afforded to those who buy foreclosures.

Lenders will not give homebuyers money for a dwelling that they consider uninhabitable or appraise below the purchase price. If you are an investor paying cash, of course, this will not be a problem.

The HUD Section k program can also help in some circumstances. Common sense says that banks should want to unload REOs as quickly as possible, but in reality, banks sometimes drag their heels in considering offers and throughout the escrow process. Since no one from the bank has ever lived in the house, they are unlikely to have any knowledge of existing problems with the property.

You will have to uncover everything yourself during the home inspection, by asking neighbors, or through experience after you become the homeowner. All of a sudden, good deals seem few and far between.

A foreclosed home is one that the bank has taken back or repossessed from the previous owner who was unable to pay the mortgage. Foreclosed homes are found through three different sources:. To be fair, buying a foreclosed home can also be riskier than making a traditional purchase from an owner-occupant or another investor. Some of the potential disadvantages of buying a foreclosed home include:.

Although every housing market may be a little different, here are the general steps to follow to buy a foreclosed home:. There are three parties you could buy a foreclosed home from, depending on the stage of the foreclosure process the property is in:.

When you buy from the homeowner, technically the property is in pre-foreclosure. Be prepared for a long waiting period, and extra short sale paperwork from the bank and the seller. Once the home has been foreclosed, the bank becomes the new owner. Also known as REO real estate owned property, the bank normally clears the title and evicts the owner who defaulted on the mortgage before reselling the home.

Sign in here. Access to timely real estate stock ideas and Top Ten recommendations. Learn More. You might snag a great deal, but there are risks involved. Real estate has long been the go-to investment for those looking to build long-term wealth for generations. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide. 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. We'll start with the benefits. Many people buy foreclosed homes for good reasons.

Let's take a look at some of those reasons. One benefit of buying a bank-owned property is snagging a great deal.