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