Whether you're looking to buy your first home or you're already an experienced homeowner, you've probably heard that purchasing a foreclosure is one way you can save money in the process—but, how does that process actually work? And is it worth it? What about the risks? If you're asking yourself these questions—or if you're considering buying a foreclosure but you have concerns, here's what you need to know.
So... What is a Foreclosure?
Homes are foreclosed on when a homeowner can no longer pay the mortgage—Zillow explains foreclosure as "a legal process by which the owner forfeits all rights to the property." Essentially, if the owner can't pay off the outstanding mortgage or sell the property themselves, the home goes to a foreclosure auction. If it still doesn't successfully sell at the foreclosure auction, it becomes the property of the bank or lending institution, which can then sell it (most often through a real estate agent, but sometimes through a liquidation auction).
How Does Buying a Foreclosure Work?
According to NerdWallet's mortgage expert, Tim Manni, buying a foreclosure isn't all that different from the standard homebuying process—you still need to get pre-approved and have a steady income, low debt and good credit score, he explained—just with a few caveats. The process might be slower and more of a challenge, and more importantly, you'll have to deal with home fixes and upgrades yourself.
"You're not buying from another consumer, you're purchasing the home from a bank," Manni said. "This could mean that communication is slower, there's less negotiation when it comes to the asking price, and you're buying the home 'as is.' That means there's no one to fix it up before you move it. Whatever condition it's in, that's the way you're getting it."
What are the Pros of Buying a Foreclosure?
The biggest pro for buying a foreclosed home? It'll cost you less to purchase. "There's a really good chance that the price of a foreclosure is going to be a lot cheaper than a non-bank-owned property," Manni said.
Plus if you're looking to flip a home as an investment, Manni said a foreclosure is a smart option. "For consumers who want to dip their toes into real-estate-investing waters, buying a foreclosure is a great first step."
What About the Cons? Isn't it Risky?
It's likely that if you're buying a foreclosure, it won't be move-in ready. You might save money on the purchase itself, but you'll definitely want to make sure that you won't ultimately end up spending more just trying to fix it up—it's important to know what you're getting yourself into.
"Sure, the bank can pay a local landscaper to cut the grass once a week, but inside, the house is likely to be neglected," Manni explained. "The lack of air movement alone—from occupants doing simple things like opening and closing doors and windows—could lead to the growth of mold and other bacteria."
Aside from the possible maintenance issues, Manni explained that the buying process can get a little tricky—issues with the title and liens against the property might arise, for example—which is why he recommends using a real estate attorney if you do plan to buy a foreclosure.
Advice for Prospective Buyers
Just because it's a little risky, doesn't mean it's not worth it.
- Determine your plan first. According to Manni, one of the first things you need to figure out is whether you plan to flip the home, rent it out or live in it. "That decision will influence how much money you spend on repairs and upgrades, and how quickly you need to make those improvements," Manni said. "If you're buying the foreclosure to flip, all your improvements need to be made in a short timeframe, and that means having a large chunk of change upfront and ready to go. If you're going to rent or live in the property, you can make your upgrades slowly over time."
- Use experienced professionals. "Experience is paramount," Manni said. "It all starts with hiring the right professionals. Finding a Realtor with local experience might not be enough. You want to hire a Realtor who is both familiar with the area and has worked with foreclosure before." It's also important to hire an experienced contractor that you trust, as well as a home inspector. And again, hiring a real estate attorney is a smart idea.
- Make sure you do your research—and are smart about the money. "It's tempting to dive right in when the price is right, AKA low," Manni said. "But what are you getting for that price? Given the condition of the home, how much money are you going to spend getting it up to speed? If you're going to flip it, what price are comparable homes selling for in the same neighborhood?" These are all questions you need to ask yourself and figure out the answer to before you make your move.
And if what you're really looking for is a more affordable home but don't want the risk that comes along with buying a foreclosure, there are other options to consider. Manni suggests expanding your home search to include more neighborhoods. "[This] could allow you to shop various types of properties at different price points," Manni said, noting that there are also state and local homebuyer assistance programs that can help with closing costs and down payments—you just have to do your research.