Pros and Cons of Buying Foreclosure Homes

Foreclosure volume is intensely cyclical, and that cycle is the whole opportunity: filings collapsed during the pandemic-era moratoria, normalized through 2022–2023 as those protections and the Homeowner Assistance Fund wound down, and move with unemployment and negative equity thereafter. Track the current numbers yourself in ATTOM’s foreclosure market report, published monthly, instead of relying on any figure printed in a book; a stale foreclosure statistic is worse than none, because it implies a market condition that has already passed.

Low Prices

One of the main attractions of buying foreclosed properties is the low prices. Banks often sell these properties at a discount to quickly move funds into other investments. Properties are typically sold at a 20%-30% discount compared to the median house price in the area. However, remember that foreclosures are sold at public auctions, so you may have to bid against other potential buyers.

Bargaining Power

If there is little demand for the property or if a home inspection reveals significant damage, you may have some bargaining power. Banks may reconsider their asking price and settle for much less.

Financing Options

Several government-backed financing options are available for purchasing foreclosed homes:

• 203(k) Rehab Mortgage Insurance: This can be used to purchase or rehabilitate a home. You can apply through an FHA-approved lender.
• HomePath ReadyBuyer Program: Offers 3% of the purchase price in cost assistance for first-time homebuyers purchasing a HomePath property.
• HomeSteps Program: Allows house buyers, not necessarily first-time homebuyers, to purchase HomeSteps homes without competition from real estate investors.

Property Condition

Foreclosed properties are often subject to damage and disrepair, as previous owners may not have had the funds for regular maintenance. Common issues include foundational cracks, leaks, and exterior damage.

Immediate Purchase Pressure

As demand for foreclosed properties and the need for liquidity rise, banks and other lenders may try to accelerate property sales by offering hefty discounts for buyers willing to purchase the property immediately “as is”. However, this means you won’t get to inspect the property, and even a day’s delay could result in someone else purchasing it. Purchasing a property without a professional inspection is risky, although some daring investors may find good deals this way.

Occupancy Issues

Depending on the state where the foreclosure process has been initiated, you may not have immediate access to the property even after purchase. Some foreclosed properties are sold occupied by previous owners or tenants, and the eviction process can take 2 to 12 weeks.

Increased Competition

Demand for foreclosed properties has increased since 2021, following the approval of the Homeowner Assistance Fund (HAF) under the American Rescue Plan (ARP) Act. This act supported many homeowners facing foreclosure, reducing the number of foreclosed properties hitting the market. More foreclosed properties are expected to enter the market following the wind-down of HAF allocations.