As home prices soar in many cities, buyers may look to foreclosures to land bargains on houses. Foreclosure happens when a borrower can no longer make mortgage payments, and the lender seizes and then sells the home to recover losses.
Foreclosed homes are often sold for less than their market value.
That discount could bring a home within reach, but the financing and the home’s condition could present challenges. Before you bid on a foreclosed home, make sure you know the risks and the limitations.
[Read: Best Mortgage Lenders.]
Is It a Good Idea to Buy a Foreclosed Home?
Buying a foreclosure can save you some cash, but it comes with risks. If you pursue a foreclosure, it helps to have a “stomach of steel,” says David Reiss, law professor and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School.
Expect a lot more ups and downs than the typical homebuying process, says Reiss, whose work focuses on real estate finance and community development.
Homebuying, including financing, can be more complicated with a foreclosed home. Yet the lure of savings can be irresistible.
“It can be like a 15% discount on your neighboring houses,” Reiss says. “So, it can be significant.”
But your savings will depend on the local real estate market and the condition of the foreclosed home, says Vince Malta, a San Francisco Realtor and president of the National Association of Realtors. Properties that need a lot of work sell for less than market value because of their condition and lower demand.
Not every foreclosure is a “steal” or a very good deal, Malta says.
“The truth is, the bank doesn’t want to ‘give’ the house away or sell it for less than it’s worth,” he says. “Foreclosures generally sell for very close