Experts: Should You Buy a Foreclosure? What It Really Costs
Written by
Nicole Spector
Edited by
Ashleigh Ray
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The housing market has been unusually hostile for a while now. High interest rates combined with low inventory have made it especially challenging for prospective buyers to get what they want/need in a home. One way to potentially navigate some of the financial obstacles, is to buy a property under foreclosure.
What exactly does purchasing a foreclosure entail? What are the pros and cons? How can you go about the process and mitigate risk along the way? GOBankingRates consulted real estate experts to answer these questions.
Pros of Buying a Foreclosure
Affordability
Arguably the best reason to buy a foreclosure is the savings they can present versus buying a home that was intentionally listed by its owners.
“Buying a foreclosure often allows buyers to purchase property at a much lower price than its market value,” said Mark Buskuhl, the founder and CEO of Ninebird Properties. “This is due to the fact that foreclosed properties are usually sold as is — without any repairs or improvements being made. Besides, banks and other financial institutions typically require less money upfront on these types of homes, meaning buyers can purchase them with minimal cash out of pocket.”
Availability
Right now, real estate has a serious inventory problem, with the amount of homes on the market not meeting the overwhelming demand. You may find more options when searching foreclosure listings.
“Foreclosed properties often become available in larger quantities than regularly listed homes, meaning buyers have more options to choose from when purchasing a foreclosure,” Buskuhl said. “This can be especially helpful for those looking for a specific type of property or location that might be hard to come by through regular channels.”
Potential Return on Investment
Buying a foreclosure can provide a substantial return on investment (ROI).
“Due to their low cost, foreclosed homes can often be purchased at levels that make them easier to fix up and therefore easier to resell or rent out for a profit,” Buskuhl said.
Tax Advantages
Buying a foreclosure can mean potential tax advantages — depending on the jurisdiction in which the property is located.
Buskuhl said, “These can include reduced taxes on the purchase, along with other incentives such as tax credits and deductions for energy-saving home improvements.”
Cons of Buying a Foreclosure
Possible Need for Repairs
Foreclosures are sold “as is”, meaning that you will have to spend your own money to fix them up if they’re in need of repairs.
“Foreclosed homes might require repairs or renovation,” said Denis Smykalov, a real estate broker at Wolsen Real Estate.
Lack of Information
Another con associated with buying a foreclosure is that there usually isn’t a whole lot of information available about the property.
“Foreclosed homes are typically sold ‘as is,’ meaning buyers don’t have access to prior inspection reports or other important information that could help them make an informed decision,” Buskuhl said.
Costs on Top of Purchase Price
When buying a foreclosure, beware of any costs that may be incurred on top of the purchase price. These are fees that would be additional to any cost for repairs/renovations.
“These can include closing costs such as title insurance and taxes, as well as legal fees and other miscellaneous charges,” Buskuhl said.
A More Complicated Buying Process
Keep in mind that buying a foreclosure often involves “a more intricate buying process compared to a traditional real estate transaction,” said Jared Barnett, a licensed real estate salesperson at Compass Real Estate: The Barnett-Bittencourt Team.
Possible Tax Complications
“There’s also a risk that the property might have outstanding liens or back taxes that the buyer may be responsible for after the closing,” Barnett said, “so it’s important to do your due diligence.”
Expenses May Outweigh Savings
Though foreclosed homes may be sold at a lower price than their market value, this doesn’t equate to long-term savings. Buskuhl noted that the cost to fix up a foreclosed home (and all the fees associated with the sale) can often outweigh any savings from the initial purchase.
Steps To Mitigate Risk When Buying a Foreclosure
Do Your Research
Before buying a foreclosure, it is important to do your research.
“This includes researching the current market value of similar homes in the area, as well as any potential issues that may be associated with the property,” Buskuhl said. “Additionally, buyers should obtain a home inspection prior to purchasing a foreclosure to ensure there are no hidden issues that could lead to additional costs later on.”
Get Professional Advice
Don’t underestimate the need for the help and guidance of a real estate professional.
“An experienced agent or lawyer can provide advice on how best to proceed with the purchase in order to ensure buyers are protected throughout the process,” Buskuhl said.
Consider Other Options
Yes, buying a foreclosure can be a great way to get a good deal on real estate, but it is important to consider other options too.
“Depending on the market, buyers may find that regular homes are available at even better prices than foreclosures,” Buskuhl said. “Those looking for a long-term investment should take into account the potential costs of repairs and renovations before committing to a purchase.”
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