The Risk & Rewards Of Buying A Foreclosure
12 september 2022

Investors in real estate stepped into the market and bought foreclosed homes for a lot less than what the original owners had paid. They turned them into homes for rent, and investors sold them for a lot of money when the housing market got better.

When a property owner doesn't pay property taxes or the mortgage, local governments or lenders start the foreclosure process to take land ownership and improvements by force. This helps them recover some of the money they lost. The legal process of taking back property, usually by a bank or the local government, is called "foreclosure."

Even though no one has a crystal ball, it's never too late to start getting ready for the next wave of home foreclosures, which is likely to happen if and when the real estate market goes down. So, with that in mind, here's how to buy a home that has been repossessed.

What Does a Foreclosure Mean?

When a homeowner doesn't pay their mortgage as agreed, the lender will take the property and try to sell it to make up for its losses. How a house is taken back by the bank depends on what state it is in, but in some cases, local courts may be involved.

Why does a house gets foreclosed on

There are many reasons why homeowners lose their homes to foreclosure. Job or wage loss is one of the most common. In a survey of homeowners facing foreclosure, 54% said that a drop in income or losing a job were the main reasons.

For example, the foreclosure process started on 5,599 U.S. homes in August 2020, just four months after unemployment reached its highest point in April. Even though this number was 24% higher than in July, it was still 80% lower than in August 2019. That could be because of the safeguards for homeowners who had money problems during the pandemic.

Other reasons homeowners can't pay their mortgages on time are illness, too many financial obligations or debts, or problems in their relationships. Most people who lose their homes to foreclosure may have low to moderate incomes, making a job loss or a drop in income even harder to deal with.

What are the benefits and risks of buying a foreclosed home?

Depending on where the home is in the foreclosure process, the risk and possible rewards of buying it can vary.

First, let's talk about some of the risks of buying a foreclosure:

There are a lot of people who want to buy foreclosed homes. For example, real estate investors often bid cash for a home that has been foreclosed on so that they can use it as a rental property, with no conditions and no questions.
It's not precise or guaranteed what shape a foreclosed home is. Unlike when a real estate agent lists a home on the MLS, the bank doesn't have to tell a buyer anything about the property. So, before you bid, you should find out about the house as much as possible.
It doesn't always make sense to buy a home that has been repossessed. Even if a house is for sale at a foreclosure auction, that doesn't mean it's a good deal. Some foreclosed homes have been thoroughly trashed by the previous owner and need significant repairs like new roofs or heating and cooling systems.

But there's always a bright side. Some of the benefits of buying a home that has been foreclosed on are:

You can find good deals. Some foreclosed homes need a lot of money to fix, but others can be bought for less than what they are worth on the market. Make sure you do your homework and look at the cap rate and return on investment.
HUD foreclosures can be great for people who want to live in them. If you want to buy a home for yourself, an FHA-financed Housing and Urban Development home might be a good deal. They are usually sold first to people who wish to live in them, so if you act quickly, you might have less competition.
Add value by putting in your work. If you have the time and skills to fix things, you can save a lot of money by not hiring someone else to do the job. When it's time to sell, your "sweat equity" goes right to the bottom line, giving you accurate equity and more money.

Foreclosures have some clear benefits, including the chance to save a lot of money. But it would help if you also thought about the risks. If you decide to buy one, think about how much it might cost to fix and find out as much as you can about it before making a decision. If you can't tour or inspect the home, you might want to drive by it and look at the property records.