Should You Buy a Foreclosed Home?

By Debbie Dragon   

With pre-foreclosures and foreclosures increasing with the rising unemployment rate, more home buyers are drawn to foreclosed homes by their bargain price. But is buying a foreclosed home more than you bargained for?

Pre-foreclosures occur when homeowners fall behind on their mortgage payments and receive a default notice from their lender. The homeowner's state of residence determines the period of time they have to either sell the home or catch up on mortgage payments before the bank takes it back and lists it as a foreclosure.

Finding pre-foreclosures and foreclosure listings isn't as easy as finding homes listed for sale. You can keep an eye on public notices in your newspaper or use a service that charges a monthly subscription fee to access the database of foreclosure listings; foreclosure listing services include ForeclosedHomes.com, Bargain.com, and RealtyTrac.com.

Foreclosure home-buying benefits

The benefits of buying a foreclosed home are fairly obvious — we've all heard stories of people buying foreclosed homes for far less than market value. Executives of financial institutions prefer not to be saddled with excessive real estate inventory, so they're usually very motivated sellers. As a result, many foreclosed homes are sold at auctions at very low prices.

Banks are often willing to negotiate additional concessions with foreclosed property buyers. Below-market mortgage interest rates or additional price breaks that enable buyers to rehabilitate the property are a common practice.

Foreclosure home-buying risks

Buying a foreclosed home at rock-bottom prices is not risk-free. Homeowners who are being pushed out of a home due to a loan default have no incentive (and no financial means, usually) to maintain the home. Some become bitter and damage or destroy the home before moving out. Most lenders don't fix foreclosed properties before selling them, and some don't permit buyers at foreclosure auctions to inspect the property before placing bids. In these cases, buyers of foreclosed homes are walking blindly into an investment, not knowing the true cost of repairs until after their purchase.

Foreclosure purchases pose other risks, too. Be prepared to evict the previous homeowners if they haven't moved out by the time you've purchased the home from the lender. If there are back taxes on the property, they become your responsibility as well (even if you're still in the process of evicting the previous homeowners).

Tips for buying a pre-foreclosure or foreclosed home

If you feel the reduced price of a foreclosed home is too good to pass up, you might want to consider buying pre-foreclosed homes before jumping into foreclosure purchases. Many homeowners facing imminent foreclosure would welcome your purchase offer. Offer what they still owe the bank, and chances are they'll sell the home to you to avoid having a foreclosure blemish their credit history. At the same time, you can avoid many of the unique risks associated with buying foreclosures.

You can buy a foreclosed home in one of two ways: by attending state-run auctions and outbidding other potential buyers, or by making an offer directly to a bank that has repossessed a home. Prices of foreclosed homes are lowest at auctions, but auctions also present more risks.

In today's market, the number of pre-foreclosures and foreclosures are increasing as more homeowners fall behind on their mortgage payments. If you have the financial means to make a home purchase, you have more negotiating power than ever before — just be sure you really can afford what you're buying and you aren't rushing into anything simply to take advantage of potential bargains.