Just a few years ago, buying a foreclosed home was seen as a way to get a bargain. With a glut of foreclosures and few buyers perusing the market, lenders were willing to sell homes at a substantial discount just to get rid of them.
Those days are gone. Buying a foreclosure can still be a good move, but you're unlikely to find the same great deals. In many cities, it's a seller’s market for even foreclosed homes, so lenders know they don't have to offer bargains to unload homes. A good foreclosure, like any other good listing, is likely to draw multiple offers.
"In many cases it's still right in line with the market," says Andy Asbury, a broker at Better Homes and Gardens Real Estate Area Leaders in Minneapolis. "We don't see just crazy deals. We don't see lenders negotiating all that much off the list price."
For buyers who go in with their eyes open, buying a foreclosed home could still be a good move. But if you fail to do your due diligence, you could end up with a money pit.
When real estate professionals talk about foreclosures, they are actually talking about two very different types of sales:
- Buying a home at auction on the courthouse steps – or the digital equivalent.
- Buying a home that has been taken back by a lender. These properties are also known as REO properties, short for "real estate owned," and are held by banks and various lenders.
While both fall under the foreclosure umbrella, the two types follow different processes from bid to final sale.
Buying at foreclosure auction. In most jurisdictions, buying a property at a foreclosure auction carries substantial risk. The buyer has to bid without seeing inside the home, which makes it difficult to estimate the cost of repairs.
Plus, there is no guarantee that the property doesn't have liens, multiple mortgages, code violations or other issues that could make it difficult and expensive to get a clear title. Tenants or the former owner may also still occupy the property, and evicting any occupants will be the responsibility of the buyer.
When buying at a foreclosure auction, you’re required to pay the entire purchase price in cash. Typically this payment must be received within 24 hours. If there are problems with the property, you're stuck. A foreclosure auction is no place for amateurs.
"When you buy from the courthouse steps, there's a greater risk," Asbury says. "It really is buyer beware."
Most homes go back to the lender at the foreclosure auction because the amount owed is more than the property is worth. The lender is then responsible for paying off liens and clearing the title, as well as evicting the occupants, before putting the property up for sale.
Buying from a lender. Purchasing a foreclosure from a lender is more like buying from an individual, but there are some important differences. For one, there is no seller's disclosure about the property's condition.
"You're dealing with a seller that's never been to the property," says Alan Plager, an REO specialist with Berkshire Hathaway HomeServices in Clearwater, Fla.
Most lender-owned properties are in the multiple listing service, and your buyer's agent can make an appointment to show them to you. You can also make your offer contingent on the property being approved for a mortgage and passing with a satisfactory inspection.
A thorough inspection is crucial, especially if the property has been vacant for some time. In many cases, needed maintenance may have been put off for years. If you buy a house that requires extensive repairs, you're going to need the cash and the know-how to get the work done.
"If someone didn't pay the mortgage, they didn't upkeep," Plager says.
Many foreclosed properties don't have water or electrical service, making it harder to evaluate them during your initial visit. If you're in a place like Minnesota during the winter, it may be colder inside the house than outside, and you'll have no clue how well the furnace works.
"You can't test anything during your initial showings," Asbury says. However, he adds that making quick assessments of the plumbing system and a few other things is possible if the water works during the inspection.
Lenders will usually turn the utilities on for an inspection once the home is under contract, but there may be a charge to the buyer.
As with a private seller, you can renegotiate the deal if you uncover serious problems during the inspection, but you won't always find lenders ready to make concessions. If you're seeking a Federal Housing Administration loan, or some other types of loans, your lender will require the house to be up to certain standards. The bank that owns the house may or may not be willing to make those repairs. In some cases, if you want the house, you'll have to pay for the work before you close. In other cases, the lender may fix an issue that's required for financing.
Even if the inspection reveals multiple shortcomings, lenders are unlikely to accept a lowball offer. For one thing, in the current seller’s market, there are generally multiple offers on well-located properties. If you don't want the house in its current condition, someone else probably will.
"It seems very rare these days that they're willing to adjust the price," Asbury says. In some cases, that could mean you'd be better off walking away and searching for a more suitable property.
For would-be buyers who are struggling to compete with cash offers, foreclosed properties can present a good opportunity. Fannie Mae, Freddie Mac, the Department of Housing and Urban Development and some lenders give owner-occupants the first shot at acquiring properties. Some financing is also available to them.
To get top dollar for their properties, some lenders are making repairs before putting homes up for sale, from carpet and paint to replacing furnaces and air conditioners. In some cases, that means you could find a foreclosure in move-in condition. And you'll probably pay the same price you'd pay for any other house in the same condition.
"You're going to get the property pretty much at fair market value," Plager says. "[Lenders are] just like any other seller. Obviously, they don't want to give it away."