Advantages and Disadvantages of Buying a Foreclosure

Buying a foreclosed house can mean you get a great deal, but there are some things to watch out for, too.
Selling Your Home

Selling Your Home

By: Tara-Nicholle Nelson

Many buyers associate buying a foreclosure with getting a steal of a deal. This can be true, but there are also potential pitfalls. The pros and cons of buying a home involved in foreclosure vary with the phase of foreclosure the property is in when purchased.

Missed Payments/Motivated Seller

Advantages:

  • Seller will be motivated to achieve a fast sale, may create opportunity for below market purchase price.
  • Seller may be more likely to do repairs.
  • Seller might be amenable to providing major closing cost credits and other concessions.
  • Buyer can use regular mortgage financing.
  • Buyer can obtain desired inspections within standard due diligence/contingency period.
  • Seller must legally provide complete history of property’s condition, problems, repairs, etc.

Disadvantages:

  • Seller may not be able to negotiate price below outstanding balance of seller’s mortgage(s).
  • Sellers still have to move out.

Pre-Foreclosure/Notice of Default (NOD) or Lis Pendens Filed by Lender/Short Sale

Advantages:

  • Seller will be motivated for fast sale, increasing buyer’s bargaining power.
  • Buyer can do all standard inspections, including researching title during due diligence/contingency period.

Disadvantages:

  • Unless purchase price will pay mortgage(s) and closing costs in full, lender’s approval of price and terms of sale will be required (i.e. short sale).
  • Lender may not approve price, seller concessions or closing cost credits.
  • Short sale may take 45-90 days to close.
  • Sellers still have to move out.

Foreclosure Auction

Advantages:

  • Property will be sold for outstanding mortgage balance owed to foreclosing mortgage holder -- this can be a low price for the property.
  • Cash payment requirements reduce competition.

Disadvantages:

  • Auction purchase price must be paid in cash on the same day as the auction -- no mortgage is usually allowed.
  • No inspections allowed; as-is sale.
  • Buyer may take property and owe other liens, back taxes and mortgages. Buyer must research state of title prior to auction.
  • Bank cannot provide disclosures as to property history/condition issues.
  • If bank believes auction will not recover a good price, bank may buy the property at auction.
  • Property condition might be suspect due to damage done by upset homeowners.
  • No commissions or attorney’s fees will be paid; buyer must pay for their own representation.

Post-Foreclosure Bank-Owned Property REO (Real Estate Owned by Lender)

Advantages:

  • Bank is motivated to get property sold and will negotiate price, down payment, closing costs, escrow length, etc.
  • Title will be clear; buyer will not take on any liens, mortgage or back taxes of prior owners.
  • Inspections and mortgage financing are allowed within normal due diligence/contingency period.
  • House will be vacant.
  • Property will usually be listed on MLS; bank will pay real estate agent's commission.
  • REO sales close within a normal escrow period of time.

Disadvantages:

  • Bank will not agree to do any repairs; as-is sale.
  • Bank will usually require additional paperwork.
  • Bank cannot provide disclosures as to property history/condition issues.
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