Foreclosure occurs when a mortgage borrower fails to keep up with their loan payments, and the lender exercises its right to seize the home and resell it to recoup or at least reduce their financial losses. Mortgage issuers typically put foreclosed properties up for auction, which often means selling the home for less than market value. When homes fail to sell at auction, however, lenders may slash the sales price and sell them directly.
Because foreclosures are often terrific bargains, they are popular with real estate investors looking to use them as rental properties or flip them for a quick profit. Competing with these investors, many of whom have access to significant credit and can put down extra-large down payments or even purchase properties outright for cash, can be challenging for first-time homebuyers.
If that means you, you're not necessarily out of the running for a foreclosure purchase. But to compete with investors, you'll need to lay some groundwork to document your ability to close the deal. You'll also need to be careful and decisive about choosing a property you likely won't have much time to size up before you make a bid. To fully understand what you may be getting into with a foreclosure purchase, it's helpful and sometimes essential to work with a real estate professional with foreclosure experience.
It's also crucial to understand that foreclosure typically follows a timeline, and that purchasing opportunities and procedures differ during each stage in the process. The duration of each stage in the timeline may differ according to circumstances and state or local laws, but they typically occur in in this order:. The main benefit of purchasing a foreclosed home is savings. Depending on market conditions, you can purchase a foreclosed home for considerably less than you'd pay for comparable, non-foreclosed homes.
The main risks come from the degree to which a foreclosed property can be a mystery to the buyer. Foreclosed homes are sold in "as-is" condition, and are typically unavailable for a walk-through before purchase. Foreclosures may have sat unoccupied, without heat or air conditioning, for weeks or months prior to sale, and past owners may have neglected or even vandalized them.
If you succeed in purchasing a foreclosed home, you'll likely need some cash or available credit to get the property to move-in condition. Do-it-yourselfers may see this as a golden opportunity for savings, but less-capable or less ambitious homebuyers might consider putting that repair budget toward a down payment on a more conventional purchase.
Where to Find Foreclosed Houses The following resources can help you find foreclosed properties for purchase. Real estate professionals in your area may know of additional resources. Think buying a foreclosure may be the right choice for you? Follow these steps to ensure the process goes as smoothly as possible.
Secure a Preapproval Letter A mortgage preapproval indicates a lender has reviewed your financial status and agreed to issue you a loan up to a set amount, with a repayment term and interest rate based on a specific down payment. Preapproval attests to your ability to finance a purchase within the specified price range, and having one is practically essential when you're competing with cash buyers. We and our partners process data to: Actively scan device characteristics for identification.
I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Preventing Foreclosures. The Pre-forclosure Period. How Foreclosures Work. Investing in Foreclosures. Foreclosure Terms A-O.
Foreclosure Terms P-S. Foreclosure Terms T-Z. Home Ownership Purchasing A Home. Table of Contents Expand. How to Find Foreclosed Homes. Stages of Foreclosure. Why Foreclosed Homes Are Cheaper. Risks of Buying Foreclosed Homes. Purchasing a Foreclosed Home. Financing Options. The Bottom Line. Many online sites specialize in them. There are several types of foreclosure, including pre-foreclosure, short sale, sheriff's sale, and real estate owned.
The big advantage of buying a foreclosed home is the low price. Several government-sponsored financing options are available for foreclosed homes. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
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Partner Links. What Is a Lender Confirmation Auction? Maurie Backman has been writing about personal finance for years. A firm believer in educating readers without boring them, she … Learn More.
Advertiser Disclosure We do receive compensation from some affiliate partners whose offers appear here. Millionacres Logo. Tax Deductions Depreciation Capital Gains. New York City Denver Philadelphia. Local Real Estate News. Research Real Estate Glossary. Podcasts Webinars Videos. View Memberships. Search For. Advantages of buying a foreclosed home We'll start with the benefits. A low purchase price One benefit of buying a bank-owned property is snagging a great deal. The opportunity to buy in a neighborhood that's otherwise out of reach When you're buying a home on a limited budget, foreclosures offer a chance to get into a neighborhood you otherwise couldn't afford.
A chance to capitalize on seller concessions Buyers often incur closing costs when they purchase a property. Disadvantages of buying a foreclosed home On the other hand, there are several drawbacks you might encounter when buying a foreclosure.
You'll need cash if you're buying a foreclosure at an auction When you buy a foreclosed home at an auction, you can forget about financing that purchase with a mortgage -- auction purchases need to be paid for in cash. You may need to buy the property as-is The previous owners of foreclosed homes often don't do the best job of maintaining them. Your closing may be delayed Although lenders try to unload foreclosed properties quickly, the closing process can be lengthy. By Maurie Backman Maurie Backman has been writing about personal finance for years.
The Motley Fool has a disclosure policy. Buying a home from a lender has its issues as a result of the increased level of bureaucracy and the limited transparency afforded to those who buy foreclosures.
Lenders will not give homebuyers money for a dwelling that they consider uninhabitable or appraise below the purchase price. If you are an investor paying cash, of course, this will not be a problem.
The HUD Section k program can also help in some circumstances. Common sense says that banks should want to unload REOs as quickly as possible, but in reality, banks sometimes drag their heels in considering offers and throughout the escrow process.
Since no one from the bank has ever lived in the house, they are unlikely to have any knowledge of existing problems with the property. You will have to uncover everything yourself during the home inspection, by asking neighbors, or through experience after you become the homeowner. Because foreclosures can be great deals, they are attractive to investors looking to flip properties or use them as rentals.
Since investors can make all-cash offers with fewer or no contingencies and fast closings, their offers may be more attractive to the bank than those from would-be owner-occupants. There is money to be made in foreclosures, but you should know ahead of time the challenge that you are undertaking and choose your property carefully. Don't overlook the fundamentals that make a property desirable just because the purchase price is a bargain. You should also extensively research financing options for foreclosed homes.
While you can go the traditional route of using a private lender as you would for a conventional home, lenders can sometimes be reluctant to finance a foreclosed home, so it is worth looking into loans from the Federal Housing Administration FHA or Freddie Mac.
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