Buying A Foreclosed Home: How a Foreclosure Sale Works
Buying a foreclosed home can be a good way to score a deal while house hunting. These are houses whose owners were unable to pay the mortgage or sell the property. As a result, the lender assumed ownership and is now trying to sell it to recoup some of its costs.
Buying a foreclosed home
While foreclosures aren't as common today as they were during the height of the housing crisis in 2008, they do still happen. Currently, according to RealtyTrac, 1 in 13,000 homes ends up in foreclosure. In states with the highest frequency, such as Maryland and New Jersey, that ratio shoots up to 1 in approximately every 550 homes. That's a lot of foreclosed places.
While foreclosure is hardly a pretty story for the home's previous owners, it can be a bargain bonanza for buyers. Since banks are often eager to unload these properties, they aim to break even with an asking price that's typically the sum of the remaining mortgage note plus interest, lawyer fees, and penalties. On average, this ends up totaling about 15% below the home's actual value—and if you want to buy a foreclosure, you'll find they often sell
But buying a foreclosed home does come with risks, so buyers should proceed with caution to see if the gamble is worth it.
How to buy a foreclosed home
To find foreclosed homes, you can peruse listings of foreclosures on realtor.com®, which may also be marked as “bank owned” or “real estate owned (REO).” If you spot a home you like, contact the real estate agent on the listing as usual.
The biggest caveat when buying a foreclosed home is that it is typically sold as is, which means the bank is not going to fix any problems. And there may be plenty of them, considering that many foreclosures have been slowly crumbling into disrepair due to the previous owner's financial strain. And unlike a normal home sale, in which disclosure requirements force owners to reveal a home's every flaw, there's no such legal stipulation in a foreclosure. What you see (or don't) is truly what you get.
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That's why foreclosed homes risk costing buyers a ton of money to renovate that could negate their supposed savings. This is why Eric Workman of the Chicago-based residential rehab lender Renovo Financial suggests that buyers take extra precautions such as the following before making an offer:
If you find out the home has problems, you will want to carefully weigh whether it's worth all the extra work. In some cases it will be; in others, it may be more prudent to walk.
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