Buying a Foreclosed Home – Is It a Good Deal or Bad Deal

If you are in the market to purchase a home, it may be a good idea to check out foreclosures as well. While a foreclosure usually offers price advantage, these may not be the right choice for every prospective home buyer. Hence, it is important to weigh the pros and cons before you take the decision.

buying a foreclosed home

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Types of Foreclosures

Before you start pondering about purchasing a foreclosure, it is important you understand there are different types of foreclosures. The kind of foreclosure you choose should be based on this knowledge, as it could affect your bargaining power.


This foreclosure, also known as short sale, comes into effect when the homeowner defaults on the mortgage. So, even though the property is owned by the homeowner, the legal action by the lender is still pending. It will go into foreclosure anywhere from 90 days to 12 months. Hence, the homeowner will want to sell it quickly to prevent this from happening. If you want to buy it, your application will be first reviewed by the lender and only if it is satisfactory will the lender accept your offer. It can be a long and tedious process to get approved.

Foreclosure at Auctions

Auctions for foreclosed homes can take place at the county courthouse and online. The opening bid amount is always fixed and is dependent on the total amount of loan that the homeowner still owes the lender.

Bank Owned Foreclosure

When the auction does not reap results, the attorney of the bank purchases the property and it converts to real estate owned (REO) property that the lender owns. This is the most common type of foreclosure in the real estate market. When a lender owns the property, he will try to dispose it as quickly as possible. So, he will perform minor repairs, general maintenance and even clean it up to make the property more attractive to prospective buyers.

Can You Afford a Foreclosure?

Buying a foreclosure can be tempting. However, can you afford the property without feeling the financial pinch? The cost of the mortgage, insurance and property taxes should never exceed 36 percent of your total income.

Make it a point to get prequalified for the mortgage. It benefits you in two ways. One, you know what your budget is and look for a foreclosure within that amount. Second, you turn into an attractive buyer for the seller, as the prequalification shows you are serious about buying and not there to waste time.

Why Opt for a Foreclosure?

There are many benefits to buying a foreclosure. These include:

  • Many Choices: It may sound weird, but there are always foreclosures available, as many homeowners cannot keep up with their payments. Unexpected events can result in homeowners defaulting, adding to the pool of properties. So, you can always pick and choose a home to suit your needs and budget, depending on where you are located.
  • Good Return on Investment: Of course it is not guaranteed that the purchase will be a great investment decision, but usually it is. If you can negotiate a good price during the purchase, you could end up with a significant return on your investment a few years down the line.
  • Own a Home in the Neighborhood You Want: If you are lucky, you may end up owning a home in a neighborhood you desired without spending beyond your means. Typically, you can purchase a foreclosure in your desired neighborhood for less than the average price that similar homes are going for.
  • Fast Closing: Typically, buying a foreclosure means quick closing, as the homeowner or lender will want to sell it as quickly as possible. Once all the documents are in order, you can expect the closing to occur within 30 days of the escrow taking place.
  • Lower Prices: A foreclosure is sold for the amount owed on the mortgage plus accrued interest and other charges. Hence, you often end up paying less for the property that it is actual worth.

While a foreclosure can be an attractive investment, remember it also comes with a few disadvantages, like buying the property in as-is condition, competing with many prospective buyers, dealing with additional paperwork, lack of maintenance and cleanliness and vandalism. If you don’t mind these problems which at times can be overwhelming, you may enjoy investing in a foreclosure.

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