<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=2402978963284325&amp;ev=PageView&amp;noscript=1">
6 min read

What Makes Buying a Foreclosed Property Risky?

Mar 10, 2022 9:15:00 AM

In the world of real estate, foreclosure properties are a double-edged sword. On the one hand, foreclosed homes are often much more affordable than conventional properties listed for sale, offering a unique investment property to renovate and sell the home at a higher price. On the other hand, these homes are sold “as is,” meaning there could be any number of hidden problems with the house that won’t be apparent until after the sale becomes final.

If you’ve never owned a home before and aren’t sure where to start, it’s a good idea to find a  first-time home buyer’s real estate agent to help narrow down your options. Buying a home in foreclosure isn’t for everyone, and it’s essential to understand all the potential risks involved before making a decision. 

Learn more about the possible downsides of buying foreclosed properties, their associated risks, and useful tips that can help keep you from getting stuck in a bad deal.

shutterstock_1010611816

What Happens During the Foreclosure Process?

Foreclosure occurs when the current homeowner fails to make their mortgage payments. If you’re constantly behind on your mortgage payment, eventually, the mortgage lender will repossess the house and attempt to sell the property at an open auction. 

If no one purchases the home during the foreclosure auction, the home becomes a real estate owned (REO) property, at which point the bank reclaims ownership. At this point, the overarching goal of the bank is to recover its losses from the mortgage default, and it’s not uncommon for them to put the home up for sale at a much lower price than its estimated market value.

What Is a Common Problem With a Foreclosure Property Purchase?

Unlike a conventional home purchase, buying a foreclosed house can take an enormous amount of time. One of the reasons why foreclosed property sales take longer to close is that a private individual no longer owns the home. Instead, the house becomes a bank-owned property, meaning it’s up to the discretion of the mortgage lender to proceed with the sale or wait for more agreeable terms. Since banks can afford to wait for the best possible offer, it could take months or even a year before they reach an agreement.

This lengthy foreclosure sale process can be a problem for individuals seeking a foreclosure property as their primary residence. To avoid delays, many prospective home buyers will seek out foreclosed homes that have yet to go to public auction. Known as a short sale, mortgage lenders will sometimes allow the current homeowner to sell the property for less than they owe before the house enters foreclosure.

What Are the Disadvantages of Buying a Foreclosed Home?

Under the right circumstances, buying a home in foreclosure can be a solid investment. However, it’s critical to bear in mind the many possible downsides involved because not all foreclosed home purchases go according to plan. 

One of the concerns with foreclosure properties is that the bank will rarely allow buyers to get a home inspection of the property beforehand. This can be a significant problem for buyers on a budget, especially if the home in question has structural, electrical, or plumbing issues. 

In a traditional home sale, the buyer still typically pays for a home inspection, but they can negotiate with the seller to make their offer contingent on a home inspection and require the seller to make any necessary repairs before closing. With a foreclosure property, this responsibility for needed repairs falls solely on the buyer. In addition, banks will sometimes refuse to finance a foreclosed property to mitigate risks, so interested buyers may need to pay in cash to secure the home.

Another disadvantage is that it’s entirely possible there are multiple liens on the home, and the new buyer will need to reconcile these debts before closing. Since these liens can present obstacles to obtaining title insurance, some foreclosure home buyers find themselves stuck with more costs than they originally anticipated.

The easiest way to get around these obstacles is to find a buyer’s agent who understands the complexities of navigating foreclosure property sales. Real estate agents know how to conduct a title search ahead of the purchase to find any prior judgments or liens attached to the property that could impact the buyer down the road. With the proper guidance, it’s much easier to evade the various problems that may arise during the purchase.

Three Risks of Buying a Foreclosed Property

Like all investments, buying a foreclosure home comes with its own set of potential risks. Knowing how to identify these liabilities can mean the difference between securing a valuable investment or finding yourself in a hole. So, what makes buying a foreclosed property risky? 

Here are the three biggest perils people face when buying foreclosure properties.

The Home Needs Extensive Repairs

If a homeowner loses ownership of their property following a judicial or non-judicial foreclosure, it’s probably due to some form of financial hardship. This means it’s unlikely that the previous homeowner could afford to keep up with necessary maintenance. In these cases, buyers may discover that the costs of repairing and renovating the home exceed much of the profit potential in the transaction. 

If the home has remained vacant for some time, there is also a chance of the property becoming vandalized. It also isn’t uncommon for foreclosed property owners to sabotage their own homes before vacating out of anger over losing ownership.

The Property Is Currently Occupied

If it’s an REO property (real estate owned), it’s entirely possible to find that the previous tenants still reside on the premises after purchase. When a purchased foreclosure home is occupied after closing, the buyer may need to file a formal eviction notice. This process can take between 30 and 90 days, depending on state law. If the current tenant does not respond to this eviction notice within a pre-established timeframe, you can choose to file a lawsuit known as an “unlawful detainer.” Filing an unlawful detainer usually gives the current occupant an additional 30 to 60 days to vacate.

There May Be Hidden Costs and Fees

As previously mentioned, foreclosed home buyers run the risk of assuming liens or debts of the previous owner. However, the new buyer may also be responsible for other costs that may not become apparent until later. One of these hidden costs can be increased property taxes following extensive renovation since the value of the home has increased.

You also need to consider the fees associated with acquiring legal counsel if you meet resistance from the previous owner or current occupant. If the foreclosed homeowner decides to defend themselves in eviction court, court costs and attorney fees can quickly add up to a lot of money. Meanwhile, the home in question will remain in a kind of legal limbo until the legal side of things is resolved, leaving the new buyer holding the bag on a property that isn’t producing any income.

Tips for Avoiding the Pitfalls of a Foreclosure Property

Buying any home is a big decision, but with foreclosed properties, the buyer is the one who assumes much of the risk. Although buying foreclosures can come with many downsides, there are several ways you can protect yourself from getting caught in a bad deal. Follow these simple tips to ensure your next foreclosure property purchase is worth the time, money, and effort you put into it.

Find the Right Agent

Before buying any home in foreclosure, your first step should be to search for an agent who can guide you through the process. If you’re uncertain about where to start, use an agent finder online to narrow down your choices to the most experienced candidate. Their knowledge and expertise will prove extremely useful in finding a foreclosed property free of liens or legal issues that could mire the buying process for months.

Do Some Research

Whenever possible, find out everything you can about the foreclosure property before making any commitments. Pay careful attention to the home’s curb appeal and check for any obvious signs of neglect in available photographs. If you’re familiar with the property's location, drive through the area to get a sense of the neighborhood and surrounding community. It’s also a good idea to compare the price of a foreclosed home to other properties in the area. Doing this will give you a better idea of how much the home is truly worth and what kind of profit you can expect to gain from flipping the property.

Don’t Get Emotional

Many people get wrapped up in the excitement of buying a new home, and when emotions run high, mistakes are bound to happen. Even though foreclosed homes can sometimes sell quite quickly, it’s best to remain calm, patient, and collected during your search. Remember, the goal is to find a great deal, and not all foreclosed properties are worth the time, trouble, or money. If a home you want is outside of your budget limitations and the bank refuses to negotiate on the price, it may be better to look elsewhere.

Buying a foreclosed home doesn’t need to be a struggle. At Dwellful, we can match you with an experienced real estate agent in your area who understands all the complexities of buying a foreclosed property. Best of all, our services are 100% free of charge.

Get Started

Katie Hollar

Written by Katie Hollar

Katie is the CMO at Dwellful, where she's helping empower home buyers and sellers to navigate their real estate journey with confidence, starting by finding the best local real estate agent to guide them. As the daughter of a career agent (spending many childhood weekends visiting open houses and model homes) and after personally experiencing the roller-coaster of buying and selling her own first home, Katie knows how important it is to have someone you can trust guiding the way. As a personal finance enthusiast, Katie has a passion for helping people achieve their homeownership dreams. When she's not busy spreading the word about Dwellful, Katie enjoys reading, travel, and spending time with her family.

Featured