If you ask around, you will probably find a friend of a friend of a friend who scored the deal of a life when he paid $45,000 for a foreclosure home worth $350,000. But does this make amazing foreclosure deals a reality or the stuff of urban legend?
For most buyers, foreclosures are a way to save a chunk of change when purchasing a home. However, foreclosures often come with a trail of cons that could eat up the difference in cost between a foreclosure home and a traditionally purchased home.
Before you commit to a foreclosure, look over this list of pros and cons:
Pro: Yes, lower prices
On average, foreclosure homes sale for 5% below market value. There is a wide range of variation in price across the foreclosure market. High end, well-kept homes typically sell for only a slight discount. Fixer uppers may come with deeper discounts.
Pro: Wide selection with little competition
If you’re purchasing a home for yourself, you will have exclusive access to all foreclosure listings for the first 14 days they are on the market. And because of the recent bad wrap that foreclosures have gotten, you might be one of only a few first time homeowners browsing that market.
Pro: Instant appreciation
Buying at a discount means that your home is automatically worth more than you paid. You don’t have to wait around for the market to inflate to know that your net worth has increased more than you’ve shelled out.
Con: Occupancy requirements
If you made an offer on a foreclosure as a first time home buyer, you are required to live in the home for an allotted amount of time, usually around 1 year. You may also be placed under a time crunch (around 30 to 60 days) to move in.
Con: Neighborhood depreciation
Foreclosures can slow or even reverse the appreciation of the neighborhood where they are located. If you and your next-door neighbor and your next-door neighbor’s next-door neighbor are all moving into foreclosures, there’s a good chance you won’t see much appreciation in your home beyond the initial jump.
Con: Rough neighborhoods
Consider the reason for a foreclosure: the person living in the home was chronically unable to meet their mortgage payments. It may be that the foreclosure was brought on by a single instance of misfortune, but more often than not, foreclosed properties are concentrated in impoverished neighborhoods. These neighborhoods may have higher incidence of crime, be zoned in subpar school districts, and require extra security around your new home.
Con: Damage and neglect
Also consider the circumstance for a foreclosure: the previous owner of the home has invested years of their time and money in this home, only to be evicted when they were down and out. It is common for foreclosures to carry the scars of their previous owners’ frustration, such as missing appliances, broken windows, or holes punched into the wall. If the home has been sitting empty for a while before the bank got around to foreclosing it, there may also be symptoms of neglect, like graffiti or mold.
You should be prepared to fork over some of the money you’ve saved on the foreclosure to cover renovation costs, which may range from minor to severe.
Con: Title issues
Foreclosures can get tangled, and there may be some question as to who holds the title to the property, the bank or the previous owners? If a foreclosure has a complicated backstory, like a divorce or a lease-purchase option, the title ownership may be even more difficult to navigate. A good real estate agent and closing attorney can assist you in getting things straightening out and securing the title to yourself.
Con: Sold as is
Foreclosures are sold is: no disclosures, no inspections, no contingencies. If you’re not prepared to uncover some unpleasant surprises, you’re not prepared to purchase a foreclosure home.
Purchasing a foreclosure is certainly a bold enterprise; however, the payoff can be high. If you find a foreclosure in a good, stable neighborhood and are willing to invest time in repairing any internal damage, you could be very happy with the result of your gamble!