Pros and Cons of Buying a Foreclosure Home

Oct 31, 2022 3 min read

Buying a foreclosed home has grown in popularity among owner-occupied buyers. According to ATTOM Data’s August 2022 U.S. Foreclosure Market Report, home foreclosures on U.S properties are up 187% from last year. This presents an opportunity to become a homebuyer at a cheaper price. Be aware of the pros and cons that come with purchasing a foreclosure by familiarizing yourself with the process and your purchase options. 


How Does Buying a Foreclosure Work?

The process of purchasing a foreclosed home depends on which stage of foreclosure you’re coming in at. Besides the different stages, the process is typically similar, with paperwork being the biggest difference when signing at closing. 


Short Sale

A short sale is usually a last resort for homeowners facing foreclosure. At this stage, the home is worth less than what the homeowner’s owe. In this situation, the lender also has to accept the buyer’s offer since the money will go directly to them. In order for a homeowner to list their property as a short sale, they typically need to prove financial distress such as proof of unemployment.


When purchasing a short sale, you may be left waiting months for the lender to agree to the sale. Properties available for short sale are sold as-is but it’s still important to get an inspection to be aware of what you’re agreeing to. With a home in decent condition, a short sale could be a good opportunity to save money on a new home.


Auction

Homes are sold at auction when the homeowner defaults on the mortgage loan and the lender retakes possession. Lenders are looking to resell the home at a much lower price as soon as possible to recuperate some of the money they lost. If you’re planning on making an offer, make sure you have the cash payment on hand. Foreclosed homes are typically cash-only sales but if the bank agrees to a mortgage loan, you’ll need to be pre-approved for a foreclosure purchase when making your offer. Like a short sale, the home comes as-is. 


Post-Foreclosure

If a property doesn’t sell at an auction, it then becomes owned by the lender as a real estate-owned (REO) property. Buyers can purchase property from a lender’s REO. This is done after the lender has evicted the homeowner’s and the property title has been cleared.


Due to the home’s history, most REO properties aren’t sold directly to a buyer but usually with another real estate agent involved which represents the buyer. REO properties are also sold as-is, but buyers have the opportunity to get an inspection before closing. 


Benefits of Buying a Foreclosed Home

It’s exciting to purchase a new home, but buying a foreclosure comes with a few additional perks. 


Low Purchase Price

Purchasing a foreclosure home is a way for buyers to find a home within their price range, or as a way to get a good deal on a home that would otherwise be out of their budget. 


Bargaining Power and Concessions

Lenders are eager to sell off their foreclosed properties to recuperate their loss. One perk of buying a foreclosure is the buyer tends to have the upper hand when negotiating the home price and who pays closing costs. 


Financing Options

Having a pre-approved loan or financing plan ready is a positive sign to sellers that you’re serious about purchasing a property. If you’re looking how to fund your new home purchase, the government offers several loan options that have lower qualification requirements and take into consideration first-time home buyers.  These include a Federal Housing Administration (FHA) backed loan, a VA loan for veterans, and a USDA loan for purchasing or improving a home in a rural area. 


Disadvantages of Buying a Foreclosed Home

Foreclosures can save you money upfront, but they also come with unique challenges. 


“As-is” Home Condition

A lot can be waiting in the unknown. When you purchase a home as-is, you’re agreeing to take the home knowing you could find repairs needed to be made. If allowed, have a home inspection done prior to closing or right after if not allowed beforehand. A home inspector will be able to point out the repairs and maintenance needed to make your home safe. Don’t forget the high costs that can go into repairs. Consider pulling your offer if you find major money pit red flags.


Length of Closing Period

For most potential buyers, knowing when they get their new home is important. Unfortunately, the perk of shaving dollars off the home price can be offset in a short sale due to the long waiting periods while the lender makes their decision of whether to approve the offer or not. While you’re waiting, you could encounter a different property the piques your interest or you could be left deciding whether to renew your apartment rental based on how long the bank is taking. 


Competitive Market

Since the housing crisis of 2008 and the current rising home prices, buying foreclosed homes has become a competitive market. It’s not just potential homeowners in the market, but also real estate investors who are looking for a way to generate more income by creating rental properties. 


Coverage for Every Home

Buying a foreclosed home is a large investment. Make sure you protect your new home and the upgrades you make by connecting with a local Farm Bureau agent to review your home and property coverage.

Want to learn more?

Contact a local FBFS agent or advisor for answers personalized to you.