A foreclosure happens when a property owner stops paying their mortgage or other financial obligations to the lender. The lender (typically the bank) will take back the rights to the home, evict the owner, and try to resell the house to someone who will be able to pay for it.
Foreclosed homes are often seen as a deal for homebuyers. The bank or financial lender is highly motivated to sell the property so they can gain some of their profits back, which means they will try to sell the foreclosed house for a lower price than others within the market.
However, buying a foreclosed home isn’t always the deal that some people think it is. There are many pitfalls and considerations to keep in mind if you are considering entering the foreclosure market or buying a foreclosed home. Here’s what you need to know.
The Number of Foreclosures Depends on the Market
If you are specifically considering entering the foreclosure market, the current housing market might not be the best option for you. The number of foreclosed homes on the market last peaked in 2008 (at the height of the last recession) when there were more than 2.87 million U.S. properties with foreclosure filings against them, but they have since declined to pre-2008 levels.
Along with the number of foreclosures, homeowners are also spending longer in the foreclosure process. In 2008, most homes spent about 100 days (a little more than three months) going through the process to complete a foreclosure. In 2019, that number reached 835 days. This data also varies regionally, with foreclosures in states like Indiana taking up to 1,806 days (almost five years) and homes in West Virginia taking an average of 159 days.
All of this is to say that the foreclosure market may be limited because of the current economy and even further limited by your region. It may be best to avoid this option, or wait for the market to change in the next few months or years.
You May Experience More Competition to Buy a Foreclosed Home
You’re not the only one keeping a close eye on foreclosed homes in your area. There are professional investment companies, developers, real estate agents, and home flippers that specialize in buying foreclosed homes. These experts look into buying foreclosed homes so they can quickly update and resell them for a much higher profit.
You will likely experience these types of buyers if you try to get a home through a foreclosure auction. With these auctions, you have to pay in cash (so the bank immediately recoups its loss) and you often buy the home sight unseen. You also have to compete with dozens of other buyers to get it. Most homebuyers will try to avoid the auction process and instead will work with the bank to buy a home before it goes to auction.
Before you start attending auctions or inquiring about foreclosed homes, make sure you can handle the competition and cost of navigating the real estate market in your area.
What You Save in the Short Run You May Pay in Repairs
At face value, buying a foreclosed home might seem like a deal. You get the house for a great price and just have to clean it up a little. However, you may actually spend just as much (if not more) than if you bought a new or non-foreclosed house. The hidden homebuying costs and basic repairs you need will add up – and that’s before you make aesthetic changes to improve your space.
Most experts recommend following the “one percent rule” for home maintenance. This means you need to set aside one percent of the home’s value for upkeep. However, this may be more for your foreclosed home.
You may need a significant amount of money for repairs and updates before you move in, and you should set aside one percent of the home’s market value – not what you bought for it. For example, if you buy a $500,000 home for $300,000 as a foreclosure, you will still need to set aside $5,000 for maintenance costs each year.
Always Make Sure You Get a Home Inspection
If you are interested in buying a foreclosed home outside of an auction setting, then make sure you get a home inspection before you agree to anything. You need to know the full extent of the damage involved with the space. This will help you calculate how much work is ahead of you to repair the house and make it livable.
While there are many foreclosed homes that only need minor updates and repairs, many need special care and improvements – especially if they have been abandoned for several years. The longer a house stays vacant and unmaintained, the more time there is for it to wear and crumble.
Look for a Real Estate Agent That Specializes in Buying a Foreclosed Home
If you are committed to buying a foreclosed home, then you need a Realtor® who specializes in this market. Find someone who can provide you with the information you need and who can keep you competitive in the market.
To find the perfect Realtor® to help you with your search for a foreclosed home, use the Effective Agents agent search. Enter the criteria you’re looking for in an agent, and we’ll match you with the perfect person with the skill set needed for your home search.