PROS AND CONS OF BUYING A FORECLOSED HOME

For many people, buying a home is the largest purchase that they'll make in their lifetimes. Supply of homes on the market for sale, down payment amount, neighborhood quality and the house's condition are just some items on the checklist of what a potential homebuyer should consider before making a purchase. And stress, time and money concerns inevitably take a toll on anyone who's in the market for a home.
However, there are some ways that you could reduce the costs of the homebuying process. For example, buying a foreclosed home presents a unique opportunity, as well as having some major drawbacks. (See related: Buying Foreclosures at a Bargain Price.)

What Is a Foreclosure?

A foreclosure is series of actions in which a lender attempts to retrieve the balance of a loan they had previously issued to a homeowner who no longer can afford to make principal and interest payments on their mortgage. The lender has several options that it can pursue, including revising the payment schedule to make the loan more affordable for the homeowner or putting the house up for auction. Or the lender, most commonly a bank, can take ownership of the property with the hopes of selling it themselves. When a bank intends to do the latter, it typically uses a Multiple Listing Service (MLS), which allows the home to be viewed by the public.

The Pros

Discounted Price
Foreclosed homes are found throughout the United States, in a variety of neighborhoods. These properties have the potential of being marked down significantly from other properties in the same area. So this circumstance can create the opportunity for someone to purchase a property at a considerable discount, enabling them to buy a property that otherwise would have been unavailable to them.
Appreciation Potential
If there are savings on the acquisition side, the lower foreclosed price improves the likelihood of the buyer realizing a gain on their investment sometime in the future. If the foreclosed home is sold for less than what similar properties on the same street or division are worth, the buyer's percentage increase could be greater if there's a general rise in value for all homes in the neighborhood.
Bargaining Power
If their timing is right and if they follow proper negotiating tactics, a prospective buyer can use the bank’s possession of a foreclosed home to their advantage. The truth of the matter is that banks are usually better suited to be issuing loans to homebuyers than they are selling homes directly. Financial institutions typically want to rid themselves of foreclosed properties quickly (for a reasonable price, of course). Their aim is to secure as much of the original loan amount as possible. So the longer that the bank has held the property, the greater the odds that they will seriously consider lower offers.

Cons

Unpredictable Costs and Damages
When foreclosures are placed on the market for sale, they are listed “as-is.” In other words, the bank doesn't claim any responsibility for the current condition of the property, nor will they make any repairs before it is sold. Fortunately, a home inspection report can reveal many potential problems with the house and a general contractor or handyman can provide a potential buyer with repair estimates.
The problem lies in what sometimes isn't detected in these assessments (and don’t forget that repair estimates aren’t guaranteed figures, either). Homes that have sat dormant for months or even years have likely been exposed to the elements and thus have a substantial risk of some kind of damage. Mold, impaired plumbing and wood rot are just a few things that aren't always found on an inspection report but can wreak havoc on the owner of a foreclosed property, long after the closing paperwork is signed. (For more, see: The Pitfalls of Buying a Foreclosure House.)
Additionally, delinquencies such as back taxes and tax liens can add further costs to an otherwise desirable house. Whatever is owed the government must first be paid and settled before the buying process can go forward. This leads us to the next drawback of buying a foreclosed home.
Slow Process
The preceding complications often mean lots of paperwork. Typically, foreclosures will have a number of additional documents that have to be completed to prepare for the closing, which isn’t always so timely. Response times between the bank and other involved parties can be sluggish and could seem like an eternity for an eager prospective homeowner. Serious damage found in the house can result in a lower home appraisal, which may affect the buyer's ability to secure a loan. Some lenders won’t lend below a certain dollar amount because the profit potential on a lesser loan isn't worth the risk.
Increased Demand
As with any market, whenever there's a chance to acquire something at a discount from the going rate, demand will soar. So increased buyer interest and competition are inevitable when dealing with worthwhile foreclosed properties. Very often, a foreclosed home can be priced below the other homes in the surrounding area (these homes are otherwise known as comparables, or comps). When homebuyers and even investors identify these attractive deals, numerous offers can come in rapidly and turn into a bidding war in some instances. So what was once an under-priced home in a great neighborhood can rapidly become a costly property.

The Bottom Line

On the surface, foreclosed homes can seem awfully appealing. However, costs can be extremely unpredictable and underlying damages could make a property undesirable. The buying process is often sluggish, which might spur second thoughts in the minds of buyers, while heavy demand for enticing foreclosed properties might push some hopeful purchasers away.
With all this being said, foreclosed homes can wind up being incredible deals. Buyers have the unique opportunity to pay below-market value for homes which wouldn’t be available under normal circumstances. Paying less makes having a greater price appreciation more achievable for buyers, who have the potential to sell the house for a more sizeable gain sometime in the future. If nothing else, buyers need to perform due diligence by scheduling thorough home inspections and getting multiple repair estimates. If done responsibly, purchasing a foreclosed home can allow a buyer to reap a myriad of benefits for many years to come. (Suggested further reading: Avoiding Foreclosure Scams.)

Article on Investopedia.com
Courtesy of Lina Arbelaez Premier Homes.

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