Home & Family Finance
Buying Foreclosed Houses Not a Slam-Dunk Deal
/ January 9th, 2020
Some consumers looking to buy a home are wondering: Could I find a good deal on a foreclosed house? The answer is "a most definite maybe," quips Jim Gaines, research economist at the Real Estate Center at Texas A&M University in College Station. "It depends on the locale, the quality of the property being foreclosed, and the willingness of the owner or lender to negotiate."
Proceed with caution
Good deals on foreclosure properties do exist, but once you factor in the costs of needed upgrades, they may not be good deals. In general, a foreclosed property may need more work than a non-foreclosed property. That's not to say foreclosed properties are necessarily in bad condition. For instance, some homeowners and building contractors got into subprime mortgages they eventually couldn't afford and ended up in foreclosure. These houses could be in excellent shape, even brand new. Failure to meet mortgage payments is not the only cause for foreclosure. Others include property abandonment, probate settlement after a death, income tax seizures, and nonpayment of property taxes. Procedures vary by type of foreclosure sale and locality, so check with the appropriate government authorities.
In the case of mortgage foreclosures, you can buy a property in four ways:
- Through a pre-foreclosure sale
- At a foreclosure auction
- From a lender who has taken back the property
- From the U.S Department of Housing and Urban Development (HUD)
Generally speaking, the first two methods in this list are best left to highly experienced property buyers; those who are familiar with their state's foreclosure laws, their rights, and how the process works. Mortgage foreclosure laws and procedures vary by state.
1. Pre-foreclosure sales
Here the buyer purchases the property directly from the current property owner. The transaction takes place during the pre-foreclosure stage—that is, after the owner receives the default notice and before the lender puts the property up for auction. A pre-foreclosure sale can be a touchy situation. The owner is going through a difficult time, so a buyer must be patient and cautious. Be sure to check out whether there are existing liens or tax debts on the property and inspect it for needed repairs.
As a buyer, you may or may not get a bargain in a pre-foreclosure sale. You might be able to negotiate a price that covers what the owner owes the lender, but is still less than the market value you'd ordinarily pay. On the other hand, if the owner owes more on the mortgage than the house is worth in the market, you're unlikely to get a discount.
2. Foreclosure auctions
At a foreclosure auction, prospective buyers must plunk down hefty cash deposits to be eligible to submit bids on a property. Usually the lender that foreclosed the property sets the level of the opening bid. The winning bidder has to come up with the entire purchase price amount quickly. Often bidders get no opportunity to inspect the house. You buy it "as is," and that translates into risks. The owner, knowing that a foreclosure was coming, may have stopped maintaining the property—or even damaged it deliberately out of spite. Here again, you need to find out if there are liens or taxes owed. Is the property occupied? Will you have to evict the occupants? Is the owner trying to take legal steps to keep the home, under redemption laws that exist in some states? In that case, even if you submit the winning bid, you may not get the property in the end.
3. Buying from a lender
This is a much less risky way to buy a foreclosed home. When the property doesn't sell at auction, the lender takes it back and sells it through its "real estate owned" (REO) department. The lender refers these properties out to REO brokers. With an REO, the lender usually has paid off any taxes or liens owed on the property and handled any necessary evictions. As a prospective buyer, you get to inspect the property. You also can negotiate with the lender on price.
4. Buying from HUD
The U.S. Department of Housing and Urban Development (HUD) sells homes to the public after Federal Housing Administration (FHA) mortgage foreclosures. HUD listings are free and updated weekly. These listings provide photos, inspection reports, and broker contact information. Only approved HUD brokers can submit offers on a property.
Photo credit: Andy Dean Photography