Pros And Cons of Buying a Foreclosure

Foreclosures for sale are always available, regardless of the state of the economy. Buying a foreclosure may or may not be a wise action plan. Here are some questions to consider before taking the leap into foreclosure home acquisition.

Should you buy at a foreclosure or wait until after the bank or mortgage company has completed the process?

Typically you will pay a bit less if you make your purchase at the foreclosure. However, you are truly buying the property "as is" with few, if any, guarantees. Making an offer after a home becomes an REO (real estate owned) of the lender may cost you a little more, but the owner/lender has probably spent some money in repairing deficiencies or giving the home a little TLC to make it more saleable.

Is the property truly a bargain?

Many people mistakenly believe that all foreclosures equal a bargain purchase. Just think about this belief for a moment. First, most foreclosures take place on the property where little equity exists. For example, people owning a home worth $200,000, but having only a $75,000 first mortgage will typically never allow the property to be subject to foreclosure. They may be throwing away $125,000 in equity. Contrast that example with another $200,000 home with a first mortgage balance of $196,000. If you could not afford that home, you are much more likely to let it go to foreclosure since you are losing little money. You, as the buyer, would have to pay close to the fair market value of $200,000, even if it were a foreclosed property.

Are there expensive repairs that must be completed before you could resell or live in the home?

The nature of mortgage loans makes it much easier to purchase a home in perfect condition for a higher price than to request "rehab" or repair dollars to be added to your loan. Often, you'll be required to fund major repairs out of your own pocket.

To get an idea of the market value of the home you're considering, search real estate listings for similar homes for sale in the same neighborhood as the foreclosure home. Is the price of the foreclosure substantially less than prices for similar homes? If the prices are similar, you are probably wiser to buy a home from an owner or real estate professional. Should the price for the foreclosure be substantially less than the typical fair market value for the neighborhood, you might have a true bargain.