Foreclosures 101: What to Know


The housing market today can be competitive, but despite that, there are many different home-buying options to consider. One type of property to consider is foreclosures. Homes that have faced foreclosure are a good option for some potential home buyers because they are typically priced lower than similar homes in the area. However, the lower price doesn’t come without any cons. Foreclosures often require extra work. You might be wondering what exactly the pros and cons are of buying this type of property. Let’s get into that!

What’s the Deal with Foreclosures?

You might be wondering how a property ends up in foreclosure. A foreclosure happens when a lender gains ownership of a home and puts it up for sale. Ownership is transferred to the lender when a homeowner stops paying off their home loan. The lender is often a mortgage broker or bank. When a home is foreclosed upon, the homeowner is typically given a date by which they need to move out of the home. Once the property is vacant, the bank will list it to sell. The bank understandably wants to sell the property as soon as possible to minimize their losses.

Foreclosed homes are typically sold at auctions or listed for a discounted price relative to the area. You can anticipate that a foreclosed home needs to be upgraded and will require quite a few repairs. It is likely that if a family could not continue to make their mortgage payment, they weren’t keeping up with costly repairs either.

Why Are Foreclosed Homes Priced Lower?

As we mentioned before, foreclosed homes are often put on the market at a discounted price. This is one of the main reasons buyers consider purchasing these types of properties. In addition to a reduced sale price, the purchasing transaction can also come with cost advantages. Examples could be:

  • Less closing costs
  • Reduced interest rates
  • A lower down payment

Another advantage is that buyers may have the upper hand in negotiations. This is because the owner of a foreclosed property often needs to sell the home quickly due to their circumstances.

The desire for a quick sale isn’t the only reason the owner of a foreclosed property often lists the home at a reduced price. Another reason is that these homes are typically sold as is. Meaning that the bank that seized the home likely won’t pay for necessary repairs or updates before selling the property.

Finding a Foreclosed Home For Sale

If you’re interested in finding foreclosed homes that are for sale, you’ll need to know where to look! You can look for foreclosures listed for sale on:

  • Multiple-listing service (MLS) websites
  • Online searches
  • Local newspapers

For these types of properties, you might find it listed as a foreclosure in the description rather than the headline. Review the listing to check that it’s mentioned! Another way to find foreclosed properties for sale is by reaching out to a real estate agent. They can pass along any opportunities they are already aware of or that come up in the future!

Different Types of Foreclosures For Sale

Not all foreclosed properties for sale are the same. There are different types of foreclosures to be aware of. When searching for a foreclosure, you could come across the following:

  • Pre-Foreclosure Homes
  • Auction Homes
  • Short Sales
  • Government Owned Properties
  • Bank Purchased Properties

Pre-Foreclosure Homes

Homes in pre-foreclosure are exactly like they sound. They are at the beginning stages of the foreclosure process and the property hasn’t been seized yet. This occurs when the lender files a notice of default on the home and the borrowers are notified. The homeowner will receive written notice that the foreclosure process is set to begin. The home won’t be listed for sale at auction by the bank just yet.

At this stage, the homeowner still has the opportunity to list the property themself as pre-foreclosure. This is common as it could allow the current owner the chance to pay back their loan. Potential home-buyers are likely to have the advantage in these types of transactions because of the owner’s need to sell quickly.

Auction Homes

After the borrowers are notified of the foreclosure, they’re given a grace period to repay their loan. If they cannot do so, the next step is for the home to be put up at a sheriff’s sale auction. The lender’s goal is to get paid as quickly as possible after a loan goes into default. That is the purpose of these types of auctions. You can often find these auctions in front of official buildings. They will usually post signage advertising the event so you can find them easily!

Short Sales

A short sale occurs when a lender accepts a payoff price that is less than the loan balance of the mortgage. In this case, the lender doesn’t evict the homeowner. Instead, the current owner lists and sells the property. A homeowner isn’t always defaulted on their loan in order for a short sale to occur.

Even so, a homeowner does need to provide proof that they are experiencing financial hardships before a lender will agree to this. Proof might include documents proving they’ve lost their job or other types of documentation. Short-sale properties are often listed as pending bank approval. Keep this in mind when searching for foreclosed homes online.

The purchasing process of a short-sale home doesn’t differ much from a traditional home-buying transaction. The main difference is the words used in the contracts. You can also expect there might be a few obstacles during the purchasing process. Because of this, it can often take longer than it would when buying a standard home.

Government Owned Properties

In the case that a borrower defaults on their government-backed loans, like an FHA or VA loan, it is taken back by the government and not a private institution. After the property is repossessed, brokers that are registered with the government are tasked with selling it. The U.S. Department of Housing and Urban Development (HUD) website is where you can find homes like this for sale. If you find one that you’re interested in purchasing, you’ll need to contact a government-registered broker.

Bank Purchased Properties

In the case that a home that faces foreclosure does not sell at auction, it is then owned directly by the bank. This is known as a real estate-owned (REO) property. Once the home is listed through a real estate agent, the property can be purchased directly from the bank.

The Downfalls of Buying a Foreclosed Home

We went over some of the advantages homebuyers have when purchasing a home that’s faced foreclosure. There are some disadvantages as well. Some examples include:

  • Unexpected repairs
  • Hidden costs
  • Slow closing process
  • Buyers competing for the same property

Unexpected Repairs

As we now know, foreclosures are sold as is, meaning that the bank likely won’t put much, if any, effort into necessary repairs or upgrades prior to selling the home. With this, there is always a risk that the property might need expensive repairs that you didn’t see coming. On top of that, these types of properties often need more obvious minor repairs and upgrades. Unfortunately, the previous owners don’t always come to terms with the fact that their home is repossessed. In some cases, a person facing foreclosure can do intentional damage to the property prior to being evicted. When that happens, the new owner is responsible for cleaning up afterward.

Hidden Costs

Although with foreclosed homes the purchase price is often discounted, there are some unseen costs that could come after. You could end up responsible for extra costs like back taxes or liens. In some cases, you inherit the previous owner’s debt that’s connected to the home. When purchasing a foreclosed home, the lender expects that the entire debt is repaid before the sale is final. Keep in mind these hidden costs could end up outweighing the savings!

Slow Closing Process

A closing in real estate is when the ownership of the property is officially transferred to the new homeowner. When purchasing a home that faces foreclosure, there is often a lot of paperwork that needs to be drawn up and sorted. Along the way, there are often obstacles that can make the entire process take even longer.

Buyers Competing for the Same Property

The housing market in recent years has been difficult for homebuyers with high prices and limited availability. It makes sense that when a home is listed for a reduced price, it can get a lot of attention from potential buyers. The extra competition in an already competitive market can lead to bidding wars for the property.

In this case, the price of the home can even be driven up to more than it’s worth. These scenarios can lead to disappointment, especially if you have your heart set on a home. However, it’s in your favor to keep checking up on the home if you’ve lost the bid! With foreclosed homes, it is not uncommon for the deal to flop.

Bottom Line: Should You Buy a Foreclosure?

Foreclosed homes are one option in the home-buying market. The main advantage of purchasing a home that has faced foreclosure is the reduced sale price. However, there are some disadvantages to consider as well. The price of these homes is often reduced due to the condition of the property. For a home to face foreclosure, this means that the previous owners could not continue to pay their mortgage.

If a homeowner isn’t able to pay their mortgage, it’s likely they weren’t doing necessary repairs or maintaining a good condition. In order for a lender to cut their losses, they want to sell the home quickly! To find foreclosures for sale, you can review MLS websites, other online resources, or the local newspaper. The five most common types of foreclosed properties are:

  • Pre-Foreclosure Homes
  • Auction Homes
  • Short Sales
  • Directly Purchased by the Bank
  • Properties Owned by the Government

The process to purchase each type of foreclosed property is different. It’s important for you to consider all of your options when purchasing a home. Consider if the advantages outweigh the disadvantages in your unique home-buying experience!