Advantages and Disadvantages of Buying a Foreclosure

*Buying a foreclosed house can mean you get a great deal, but there are some things to watch out for, too:

Missed Payments/Motivated Seller

Advantages:

• Seller will be motivated to achieve a fast sale, may create opportunity for below market purchase price.
• Seller may be more likely to do repairs.
• Seller might be amenable to providing major closing cost credits and other concessions.
• Buyer can use regular mortgage financing.
• Buyer can obtain desired inspections within standard due diligence/contingency period.
• Seller must legally provide complete history of property’s condition, problems, repairs, etc.

Disadvantages:

• Seller may not be able to negotiate price below outstanding balance of seller’s mortgage(s).
• Sellers still have to move out.

Pre-Foreclosure/Notice of Default (NOD) or Lis Pendens Filed by Lender/Short Sale

Advantages:

• Seller will be motivated for fast sale, increasing buyer’s bargaining power.
• Buyer can do all standard inspections, including researching title during due diligence/contingency period.

Disadvantages:

• Unless purchase price will pay mortgage(s) and closing costs in full, lender’s approval of price and terms of sale will be required (i.e. short sale).
• Lender may not approve price, seller concessions or closing cost credits.
• Short sale may take 45-90 days to close.
• Sellers still have to move out.

Foreclosure Auction

Advantages:

• Property will be sold for outstanding mortgage balance owed to foreclosing mortgage holder - this can be a low price for the property.
• Cash payment requirements reduce competition.

Disadvantages:

• Auction purchase price must be paid in cash on the same day as the auction - no mortgage is usually allowed.
• No inspections allowed; as-is sale.
• Buyer may take property and owe other liens, back taxes and mortgages. Buyer must research state of title prior to auction.
• Bank cannot provide disclosures as to property history/condition issues.
• If bank believes auction will not recover a good price, bank may buy the property at auction.
• Property condition might be suspect due to damage done by upset homeowners.
• No commissions or attorney’s fees will be paid; buyer must pay for their own representation.

Post-Foreclosure Bank-Owned Property REO (Real Estate Owned by Lender)

Advantages:

• Bank is motivated to get property sold and will negotiate price, down payment, closing costs, escrow length, etc.
• Title will be clear; buyer will not take on any liens, mortgage or back taxes of prior owners.
• Inspections and mortgage financing are allowed within normal due diligence/contingency period.
• House will be vacant.
• Property will usually be listed on MLS; bank will pay Real Estate Broker's commission.
• REO sales close within a normal escrow period of time.

Disadvantages:

• Bank will not agree to do any repairs; as-is sale.
• Bank will usually require additional paperwork.
• Bank cannot provide disclosures as to property history/condition issues.