Buying a foreclosed home can be a great way to save money on your home purchase, but there are hidden pitfalls you should be aware of. If you’re not prepared, you could sink your money into a disaster instead of into a fixer-upper. 

These pros and cons can change depending on what phase of foreclosure the home is in.

Pre-Foreclosure

During the pre-foreclosure phase, the homeowner may be trying to sell the home quickly to keep the foreclosure off their credit.

Pros

1. You’ll have plenty of bargaining power as the seller will be extremely motivated.
2. The homeowner might not have given up hope yet, which means the home may still be in decent shape.
3. You should be able to access the title history as normal.
4. You should be able to access an inspection as normal.

Cons

1. The seller’s bank must approve any short sale, and it could fall apart prior to closing.

The Foreclosure Auction

When the home goes to auction you get a chance to own the home for pennies on the dollar, but you must be prepared. Auctions are the hardest to get right, and you could end up in real trouble if you don’t know what you’re doing. 

Pros

1. You’ll save a ton of money on a home purchase, and may get a fine property at rock bottom prices.

Cons

1. The bank won’t finance an auction purchase, so you must be prepared to buy with cash. 
2. You won’t have a chance to inspect the home, and must purchase it as-is.
3. The home may be in poor repair, either because the owners didn’t maintain it or because the owners vandalized it.
4. You’ll be competing with other bargain hunters, and a bidding war could drive the price higher.
5. You won’t have any information about the title history, which means you might inherit a home with liens and back taxes that will become your responsibility.
6. The previous owner might not have vacated the property yet, and it’s not always easy to get them off the property.
7. In some states, the previous homeowner may still have a right of redemption, which means you may be forced to sell the property back to them before you can do anything with it.

The Bank Owned or REO Property

At this stage, the home hasn’t sold and the bank is stuck with the home. They may be listed on various websites for a much lower price than you’d expect to pay for a comparable home, and for far less than you’d get for buying it at a short sale, or even at auction.

Pros

1. You will be able to purchase the home for less, and you’ll have a good idea of how much you’ll have to spend.
2. While it can be more difficult to obtain financing for a bank-owned or REO property, programs do exist. 
3. You’ll be able to obtain title history and obtain an inspection. 
4. Sometimes the bank who owns the property will be willing to cover closing costs or make other concessions just to get the property off their hands.

Cons

1. The house may have been in poor repair prior to auction. Now it may be in even worse repair, because it’s been sitting for some time with nobody to maintain it. It may have also fallen victim to additional vandalism. Thieves may have come in and made off with appliances, fixtures, doors, and anything copper that they can find.
2. The property will be sold as-is. 
3. Squatters may have moved in, and it can be difficult to get them out again.

Looking for Financing?

If you are ready to tackle the pitfalls, have great credit, and work with the right mortgage lender, then a foreclosure home might be a great financial choice. Ready to discuss your options?

Contact Alex Doce to schedule your free consultation today.