3 Pros and 3 Cons of Buying a Foreclosure

Print Friendly

KEY POINTS

• You may be able to get a good price on a foreclosure.
• If you buy a foreclosed home at auction, you’ll usually have to pay cash.
• The home may not always be in good condition, however.

In the third quarter of 2023, 100,546 U.S. properties were in default and had foreclosure filings. Homes go into foreclosure when property owners can’t pay the mortgage loan or have other outstanding claims against their house that result in foreclosure being initiated (such as unpaid property taxes or homeowners association fines).

Sometimes, savvy investors — or even just people interested in buying a house — may want to purchase a foreclosed home. But before moving forward with this type of transaction, it’s very important to consider the pros and cons.

3 benefits of buying a foreclosure

Here are a few advantages of purchasing a foreclosed home.

1. You may get a great deal. It’s very common for foreclosed properties to sell at a price below market value. That’s because not everyone wants to deal with the hassle and risk of buying a foreclosure.
2. You can often take ownership of the property quickly. You won’t have to go through the traditional purchasing process, which can take weeks or even months as you wait for a seller to be ready to move out and your mortgage lender to originate your loan.
3. You may get instant equity. If you can pay below what the home is worth, or if you can buy a foreclosure that needs some fixing up and you can do the work cheaply to increase its market value, you may end up with a lot of equity in the house very quickly.

For most people, the biggest benefit of buying a foreclosed home is the possibility of getting a great deal. Paying a lower price for a property can enable you to get into a home you might otherwise be unable to afford or can allow you to make an investment in real estate that earns you a generous profit.

3 big downsides of buying a foreclosure

While there are some huge benefits to buying a foreclosed home, there are big potential downsides to be aware of as well. Here are some of the biggest cons of buying a foreclosure.

1. You’ll probably have to pay cash or get alternative financing. If you are buying from a foreclosure auction, you will generally not be able to get traditional financing. You may need to pay cash or use alternative — and expensive — sources of financing, such as hard money loans.
2. You often can’t tell the condition of the property. You usually aren’t allowed to go into a home in foreclosure to inspect the property before buying it. This could mean you end up buying a home that has a lot of problems — especially because people who are being foreclosed on can sometimes damage a property on purpose or may not have been taking care of it due to money issues.
3. Unpaid debts could come with the home. A foreclosure doesn’t necessarily wipe out all claims on the property. If creditors have a lien against the home or an ownership claim in it, this could become your responsibility since the lien follows the property. You can usually do a title search to find out about most claims, but this is not necessarily a guarantee other debts won’t pop up. Getting title insurance is a good idea in this situation.

You need to carefully consider these potential disadvantages and make sure you know what you are getting into if you’re thinking of buying a foreclosed home. If you’re prepared to finance your purchase, have researched outstanding claims on a property, and are ready to get to work making fixes if necessary, then buying a foreclosure may be a good option. But if you aren’t ready to take on these potential issues, then purchasing a home through the more traditional process is a better bet.

Source: Fool.com