Pros And Cons Of Buying A Foreclosed Home

Yoana Nin
Yoana Nin
Published on December 2, 2015

Foreclosed homes have become somewhat of a popular option for home buyers given the increase in quality of foreclosed homes. Regardless of the path you’re choosing to take in your home buying experience, odds are you’ll come across a foreclose and you’ll question it as a viable option. So let’s break down the different elements of a foreclosed home you’ll need to consider before deciding to make your purchase.

In the recent past foreclosures were often left abandoned. However nowadays, banks usually renovate them before selling. They may frequently seem to offer a better deal but the question remains, is this always the case?

Advantages 

They are cheaper

Currently, foreclosed houses are approximately 5% cheaper in comparison to equivalent homes which are not in foreclosure even if they are in the same location. Previously, they were 15-20% below the market rate, but the current rates are still a better deal. Over time, the value of the home may appreciate and incase you decide to sell, you will definitely make a profit.

Disadvantages

1) Foreclosed homes are still expensive to some extent

The prices of foreclosed homes (REOs i.e. bank real estate owned homes) have gone up compared to 5 year ago (although still lower than the market rates). Many banks invest their money into renovating these houses with the hopes of selling them at a good price. This is why the prices have gone up in addition to the fact that there are also huge risks involved. Although you may buy it slightly cheaper than the market rates, you may even find that they are more expensive especially due to all the expenses that you may have to incur in the long run.

2) They may not be in the best condition

In most cases, foreclosed homes are not in very good condition, often requiring significant repairs. Note that damages like roof leakages, molds, plumbing, and any other damage that may require major repairs are not often disclosed. Remember that prior to the foreclosure the home was owned by someone else. Obviously, that homeowner could not continue making their monthly mortgage payments and one of the reasons might have been because he/she did not have the funds to do regular maintenance on the home. Most of the time homes that reach the REO stage of foreclosure are in their worst state. Although you may get an opportunity to do an inspection on the foreclosure home before finalizing the process, they are always sold as is, meaning that you cannot request any repairs as contingency of the sale. You therefore buy the home at your own risk.

3) They may be located in undesirable locations

In most instances, foreclosed homes today are located in unattractive areas. Sometimes, the price of an REO may look great not because the foreclosure makes it cheap but because of its location. You may end up having to spend years stuck in a home located in a bad neighborhood because such houses often take time to sell.

4) Tough competition

Today, many home buyers are attracted to the foreclosure homes because again they are cheaper. Because of this, the competition for these houses is tough (especially for those located in prime locations). If you are not familiar with foreclosed houses or even the trends in the real estate markets, you may find it hard to get a good home or you could even end up paying a lot of money for an undesirable house.

5) Slow process with no guarantees

The process involved in buying a foreclosed home is not only long, it can also be frustrating. Apart from the paperwork, the whole process is sometimes very slow and you may even end up waiting for many weeks before you get a reply. Also remember that these homes are owned by the bank, and they will certainly attempt to get a good price to help recover some portion of their loss. If they get a better deal, your contract may end up being cancelled even if you were almost ready to close the deal.

One of the greatest investments that you can make in life will be purchasing a home. Buying a foreclosed home may seem to be a great deal but may be expensive in the long run. Do a lot of research before making the final decision. Look at the trends in the real estate market and if possible, consult a real estate agent for advice. while this terrain is certainly tricky, you can always find a diamond in the rough.

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