Advantages and Disadvantages of Buying a Foreclosure

Many buyers associate buying a foreclosure with getting a steal of a deal. This can be true, but there are also potential pitfalls. The pros and cons of buying a home involved in foreclosure vary with the phase of foreclosure the property is in when purchased. Use this handy guide to figure out what sort of property is best for you! Also see “The Stages and Phases of the Foreclosure Process.”

Missed Payments/Motivated Seller

Advantages:

• Seller will be motivated to achieve a fast sale, may create opportunity for below market purchase price.
• Seller may be more likely to do repairs.
• Seller might be amenable to providing major closing cost credits and other concessions.
• Buyer can use regular mortgage financing.
• Buyer can obtain desired inspections within standard due diligence/contingency period.
• Seller must legally provide complete history of property’s condition, problems, repairs, etc.

Disadvantages:

• Seller may not be able to negotiate price below outstanding balance of seller’s mortgage(s).
• Sellers still have to move out.

Pre-Foreclosure/Notice of Default (NOD) or Lis Pendens Filed by Lender/Short Sale

Advantages:

• Seller will be motivated for fast sale, increasing buyer’s bargaining power.
• Buyer can do all standard inspections, including researching title during due diligence/contingency period.

Disadvantages:

• Unless purchase price will pay mortgage(s) and closing costs in full, lender’s approval of price and terms of sale will be required (i.e. short sale).
• Lender may not approve price, seller concessions or closing cost credits.
• Short sale may take 45-90 days to close.
• Sellers still have to move out.

Foreclosure Auction

Advantages:

• Property will be sold for outstanding mortgage balance owed to foreclosing mortgage holder — this can be a low price for the property.
• Cash payment requirements reduce competition.

Disadvantages:

• Auction purchase price must be paid in cash on the same day as the auction — no mortgage is usually allowed.
• No inspections allowed; as-is sale.
• Buyer may take property and owe other liens, back taxes and mortgages. Buyer must research state of title prior to auction.
• Bank cannot provide disclosures as to property history/condition issues.
• If bank believes auction will not recover a good price, bank may buy the property at auction.
• Property condition might be suspect due to damage done by upset homeowners.
• No commissions or attorney’s fees will be paid; buyer must pay for their own representation.

Post-Foreclosure Bank-Owned Property REO (Real Estate Owned by Lender)

Advantages:

• Bank is motivated to get property sold and will negotiate price, down payment, closing costs, escrow length, etc.
• Title will be clear; buyer will not take on any liens, mortgage or back taxes of prior owners.
• Inspections and mortgage financing are allowed within normal due diligence/contingency period.
• House will be vacant.
• Property will usually be listed on MLS; bank will pay real estate agent’s commission.
• REO sales close within a normal escrow period of time.

Disadvantages:

• Bank will not agree to do any repairs; as-is sale.
• Bank will usually require additional paperwork.
• Bank cannot provide disclosures as to property history/condition issues.

NEXT: Find out what you need to know about your mortgage to avoid foreclosure .