Typically, foreclosed houses offer the attraction of being much cheaper than other homes on the market…but is it worth it in the long term?
We surveyed our Nest agents to get their opinions on how to determine if buying a foreclosure is right for you, and what issues you need to keep in mind when making this decision.
Foreclosure Basics
Foreclosure happens when a homeowner stops making mortgage payments. The bank or mortgage lender repossesses the property and attempts to recover the balance still owed, often at first by holding an auction for the house. If the bank fails to sell the house at auction, they can enlist the help of a real estate agent to get it sold.
At this point, you may see the house come on the market at what seems like an incredible, affordable price. But beware that appearances can be deceiving, especially with foreclosed homes. According to Nest Broker Julie Carpenter, “Though most foreclosures can be priced substantially lower, they usually need more than just a face lift. If they’ve been abandoned for a long period, they’ll probably need reconstructive surgery.”
If you still think the house looks like a great deal, it’s time to do some serious homework. Check with the bank to see what paperwork you need to have in place to make an offer. Almost every bank has different rules. Also check to see what the terms of your purchase must be—a 20% down payment is typical, and you’re often expected to cover closing costs.
Keep an Eye Out for Red Flags
The potential for problems with foreclosed homes can be daunting, so be sure you’re willing to tackle a fixer upper. Try to schedule multiple home inspections to uncover hidden issues. Any house can have problems below the surface, and foreclosures can sometimes be patched up cosmetically to fool inattentive buyers. Remember to be patient and alert!
Many foreclosures can have problems arising from two major sources: long abandonment and deferred maintenance. Sometimes months pass between foreclosure and a sale. The house may have been sitting unused for a long time without any protection from weather, mold, mildew, and critters. If the previous homeowners couldn’t pay their mortgage, chances are they couldn’t pay for needed repairs and upgrades, either. “As-is properties are not for the faint of heart,” advises Nest Broker Jessica Russo. “It pays to have experience with home maintenance and repairs before taking on a foreclosed property.”
Consider Your Timeline
While some banks may be in a hurry to get foreclosures out of their hair, others may take their time getting documents approved. “Don’t be in a rush,” Nest Broker Veronica Perkins says. “There are lots of hoops and red tape to get through. You can’t be in a rush to buy a foreclosure.”
Also consider your financial and living situations. “If you have funds set aside for repairs such as structural damage, electrical, plumbing, etc., and the flexibility to wait until those repairs are complete prior to move in, then it makes sense to purchase a foreclosure,” Julie Carpenter advises. “If you’re an investor looking to flip, that’s better too, since you don’t have to live in a construction zone.”
Remember the cardinal rules of buying a foreclosed home: Be patient and be prepared for anything. If you prefer something turnkey with fewer potential problems and much less red tape, perhaps a foreclosure isn’t for you. But if you do your due diligence and make sure you can afford to take on any necessary repairs, you could score an amazing deal on a foreclosed home!
If you’re considering buying a foreclosed home, working with a professional can be a huge help. Getting in touch with your local Nest agent is a great way to begin!