About a decade ago, you might have been hard-pressed to find a decent property that also happened to be foreclosed. The 2008 Great Recession created a subprime meltdown that not only increased the amount of foreclosures, but made it easier to find and purchase through the use of multiple-listing services (MLS). While the market has improved since then, banks still need to make up the losses on these each sale.
However, this does not mean the bank is simply going to sell the houses as fast as possible. To help you make the right decision, we’ve put together a list of the pros and cons for buying a foreclosed house in today’s market.
PRO: Cheaper Price Point
This is the first and most obvious benefit associated with buying a foreclosure over a comparable property in a similar market. You can get them at severely discounted prices—sometimes to the tune of 18-59 percent below market value, according to Quicken Loans. The longer these banks hold on these properties, the more they will have to pay in taxes, maintenance, etc.
Not only is the price point alluring, but if the market the home is in decides to take a dip, you won’t be upside down in a money-pit. Alternatively, if the value of the home appreciates, you can sell the home for a larger return on investment.
CON: Often a Risky Venture
Even though they are priced relatively low, compared to the rest of the market, they can still come with their share of baggage. Many banks will put money into the house to make the house appear nice so that the listing becomes more popular—however, this doesn’t mean that everything inside the home is guaranteed fixed. The more money that a bank puts into fixing the home to make it sellable, the less likely they are going to part with it quickly or cheaply.
You will also likely be forced to buy the home “as is,” which can come with no reporting on specific damage like a leaky roof, moldy interior or neighborhood crime. If you are planning on using the home as an investment or rental property you will have to pay a higher insurance premium along with stipulating that potential residents invest in renters insurance for themselves.
PRO: Potential Upgrade
The investor who likes to take a risk may be able to use the purchase of a foreclosed home to their advantage, such as buying a piece of land or house that is bigger than what they currently own. Or maybe the foreclosure is in a more desirable neighborhood than they would normally be able to afford. You can find foreclosures in all price ranges—from starter homes to luxury mansions— and from time to time they’ll be in great shape, ready for you to move in!
CON: Banks Are Much Less Lenient
When you are placing an offer on a foreclosure sale with the bank, you are negotiating with a spreadsheet. It is strictly a numbers game. Unlike a typical seller who may take personal factors like your background or family into account, the bank doesn’t. Whatever offer you place on the property is going to be electronically submitted and processed by an algorithm onto a spreadsheet where a banker is going to determine the outcome. It is not the same home buying experience you may expect from traditional sales, with a real estate agent helping you through the process.
Ultimately, the choice to buy a foreclosed home is up to you and is largely a case-by-case basis. However, arming yourself with all the facts is always the best recourse when approaching any large investment.