What to Expect When Purchasing a Foreclosed Home

by Emily Guy Birken · 5 comments

For the frugal-minded home buyer, purchasing a foreclosed-upon house may seem like a no-brainer. Houses go into foreclosure when the owner cannot make payments, and the bank simply wants to cut its losses for as much as it possibly can, usually at a price below the market value for the home. With the implosion of the American housing market, there has been a huge increase in foreclosed homes in the past few years, a boon to prospective homeowners and investors.

But it isn’t always. While it is possible to get a great bargain on a house by purchasing a home that the bank essentially owns, there are a great number of possible pitfalls, as well. Here are some of the unique issues that you might have to face as the new buyer of a foreclosed home:

1. The home will be sold “as is.” Unlike a traditional home purchase, you can’t necessarily expect a foreclosed upon home to be well maintained. It takes some time for homeowners to default on their mortgage, and generally their finances have been strained for some time prior to the foreclosure. That means they may not have had the funds necessary for maintenance. Also, there have been some (relatively rare) instances of “foreclosure rage,” wherein the defaulting owner leaves the house a mess for the bank and new owner. Once the home is bank owned, the bank may not spend its money on repairs, no matter how badly they are needed. This also means that you cannot expect to get any money from the bank toward necessary repairs (though you can sometimes negotiate for a lower purchase price).

When buying any home, you owe it to yourself to get a home inspection, but it is particularly important when purchasing a foreclosure. The inspection will give you a clear-eyed view of how much work you are getting into by taking over the home.

2. There is a great deal more red tape and paperwork than in a traditional sale. Closing on a foreclosure could take a great deal longer than you might expect if you have only ever made traditional home purchases. First, the bank does not have the same motivation to close quickly that a homeowner does, as it does not need to move in time for the next school year or to avoid carrying double mortgages. So your closing may be held up by a backlog of foreclosures sitting on a bank manager’s desk. Second, it’s vital that you take the time to investigate all liens on the foreclosed property. While this will protect you from nasty surprises (like owing back taxes!), it also lengthens the process of purchasing the home.

Due to the possibility of liens, it is vitally important that buyers of foreclosures acquire title insurance to protect themselves.

3. Remember that the word foreclosure doesn’t mean bargain. Depending on the circumstances behind each sale, you may not be getting the steal you may think you are. Banks want to recoup as much money from the sale of the house as possible, so they will not let the house go for a song if they can help it. It’s important to research the houses in the surrounding area to know what the market value is and if the area has become depressed due to high foreclosures. It’s also important to factor in the cost of repairs and catching up on deferred maintenance into the amount you save by buying a foreclosed home.

Purchasing a foreclosure can be a path to home ownership that will save you money, but it’s vital that prospective buyers keep their eyes open throughout the process.

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  • DAVE Z says:

    Everything about the house above sounded great til I got to the 2 bedroom 1 bath 864 sq ft part. Sounds like still is a lot to pay for a cracker box. You live in the house not the view. What if 2 people have to go to the bathroom really bad at the exact same time? or you have kids? Will they have to sleep on top of the mountain?

  • marci357 says:

    It’s just a matter of doing your homework. Check out the condition. Get a home inspection if you aren’t able to do it yourself. Be prepared financially AND emotionally for a few surprises. Have a reserve fund set up for the repairs you know will be needed. Don’t buy more than you need, because you will be maintaining “more than you need” for a long long time… Pay cash and the transaction can be done in as little as 10 days…

    But – the houses are usually priced more than fairly, and you can offer a lowball bid which may or may not be accepted, due to whether there are a lot of other offers on the place.

    Real Example: Foreclosure Price $99,000. Last sale $169,000. Previous sales over last 30 years of same house – never under $139,000. Beautiful location with sunsets and sunrises over the mountains unobstructed view on 2/3 level acre, solid foundation and frame (which are imperative!!!) 2 bedroom 1 bath 864 sq ft open floor plan inside. Double car garage with extra 9×10 room and a 3/4 bath in garage not included in square footage…
    Repairs needed: New Roof, Electrical box and some wiring and GFI’s, new septic tank, new woodstove insert, paint, door hardware, 3 doors with fist holes thru them, 3 insulated windows, water heater, stove, refrigerator. (These were all known up front as probably needed) Possibility of broken pipes – but none found later.

    So?? Do you buy it or not? I snapped it up! Full price offer plus $100 as there were other offers on it…. 10 days to close/cash deal. Repairs were $22,000. Total cost with repairs: $121,000… well under any previous sales prices in the past 30 years. And I own a piece of total paradise 🙂

    Were there surprises or owner rage problems? Yes – minor inconveniences and under $200 to fix (plumbing surprises). The important thing is: I was aware that there might be surprises, and was prepared with funds set aside to handle all the repairs…. I did not get in over my head!!! And cash for ALL – so no mortgage 🙂 I’m happy in my Paradise!

  • infinite banking says:

    KM, i’ve heard lots of similar stories, some so bad that more was spent on the remodel than the actual purchase of the house…..not smart.

  • KM says:

    My mom bought a foreclosed home, and the condition of the house was so bad that she spent a lot of money on repairs. Fortunately, the price was so low that it was a good deal even the cost of repairs. Now everyone who comes over tells us how nice our house is and we keep thinking about how it’s only a few years from being completely paid off.

    • marci357 says:

      Agree that the cost of repairs, when known up front, is not a reason for NOT buying a foreclosure, when the cost of the house itself is low enough. Every house, even those NOT foreclosures, seems to need some repair done to it – as long as you know up front, you can end up with a beautiful happy home 🙂

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