Going once, going twice, going three times, sold to the person in the red hat! What does that make you think of?
Buying a house? Probably not. But that's what buying a foreclosure is like, if you choose to do so. Don't even know what the word foreclosure means?
That's okay. We're answering what is a foreclosure and whether it's worth your time/money below.
What Is a Foreclosure?
When you don't pay your mortgage and you're too behind to catch up, the bank can seize your house. It's essentially like an eviction, except you own, not rent.
The banks contract out agents to sell these seized houses, so they can recoup some of the money they're losing from that failed mortgage.
The foreclosure buying process is usually through an auction. That is unless the bank chooses to accept traditional real estate offers.
The auction, you need to have cash on hand. You'll get to walk through the property once, then the bidding starts. Whoever can pay the most gets the rights to the house.
A lot of people think that foreclosures are gross and dirty - which they certainly can be. But many of them are just respectable family homes given up when they fell on hard times.
These homes usually sell for half or less of market value, so they're cheap, which is what you want in an investment. Especially if it's an investment property.
But it's not that simple. Here's how to figure out if buying a foreclosure is for you.
Pros and Cons of Buying a Foreclosure
Like anything, there are positives and negatives to this process. Here are a select few.
The best part about a foreclosure? It's cheap and quick. But how cheap and how quick? Learn below.
1. The Home's Price = Left on Mortgage
When a house goes into foreclosure, the bank determines the price by how much is left on the home's mortgage. So if a family has paid four years worth of mortgage payments, you'd pay the price of the remaining amount.
The more years someone made payments on the home, the cheaper the price.
Even if the previous owners only put a downpayment on the home and a few payments, that's likely still cheaper than the current property value.
That's why foreclosures in nice neighborhoods go so quickly. People know that they can't afford to straight out buy a home in that area, so foreclosure is their only chance.
2. There Aren't Real Estate Fees
When you buy the home, if you win your auction, you don't have to pay closing costs or real estate agent commission. You pay the amount you bid and taxes/property fees.
That's it. That alone can save you five thousand dollars, depending on the true market value of the home.
3. It's Faster
Buying a home in the traditional sense takes forever. First, you have to find the home, tour it, decide, then make an offer. The buyer can reject your offer and counteroffer.
If your offer is finally accepted you have to go through the home and do an inspection, plus work with both real estate agents to file the official paperwork.
Then you have to do the mortgage paperwork and sell your own home. A house purchase can easily take two or three months to finalize.
That's not true with a foreclosure. You literally own the home on the day you win the auction. There may be two or three days of processing time, but that's days instead of months.
4. Low Purchase Cost Means More Money for Renovations
Just because the house is a good price and it's in an area you like, doesn't mean you'll love the house itself. Or it's interior design scheme. It may have ugly cabinets or bright green carpet.
But since you're purchasing it for such a low price, that means you can spend more money on renovations.
And if you hate the kitchen, you're going to need that room in the budget. The average kitchen renovation costs $23,000.
Just hate a bathroom or two? That's still a $10,000 project. Other common foreclosure repairs include replacing floors, general cleaning, and potentially internal extensive repairs. See con #1 for more information on that.
The interior condition can be seen on the walkthrough - and that may be quite the trip. People getting kicked out of their own homes have been known to do some ugly things to the inside.
We're talking about smearing things on the walls and writing offensive terms.
It's not always pretty. But hey, it is cheap!
Those are a few of the positives, but let's look into the cons, to keep things fair.
The Cons of Investing in a Foreclosure
Want to know why you shouldn't go to the auction? Read below.
1. You Can't Get an Inspection
There's a reason you don't sign the final deal on the house and pay the closing fees until you get a home inspection. There could be anything from asbestos, to termites, to not-up-to-code wiring inside the walls.
Those are all things that cost a lot of money to repair and could potentially harm your family.
With a foreclosure, there's no time for you to have a thorough inspection done. Nor an appraisal. All you get is that one walkthrough to determine how much money you think the home is worth.
If you're an HGTV fan, you know that sometimes people buy a foreclosure and it turns out to be a money pit - not an investment.
As a buyer, you have no way to know what kind of tenants the last owners were. Did they do the regular maintenance it takes to keep a house healthy? That's a big gamble.
2. You Need Cash, In Hand
Do you have a spare $200,000 you can take out of the bank? Most Americans don't. Even if you're doing well financially, a lot of us would have to liquidate stocks to come up with that kind of cash.
And you wouldn't have time to liquidate stock if you just found out about a foreclosure. The auction dates are often announced a week to three days in advance.
So, if you're determined to buy a foreclosure, that means you'll have to have that kind of money ready to go at a seconds notice. That's a big chunk of money to keep in the house.
Even if you put it in a bank account, not a lot of banks can pull that amount of money at a moments notice.
3. The Bank Can Outbid You
If the bank is unhappy with how things are going at the auction, they can essentially cancel it and buy the house back. That means they'll try to sell it a different way or do an auction again later.
That's a lot of wasted effort and time if you've been touring the house and coming up with the financial aspect.
The bank is not your friend at the auction. While they want this property off their hands, they don't act like it when it comes to giving buyers information.
They can't and won't give you any information on the history or condition of the home. They also won't tell you straight out if there are back taxes or liens not included in the price of sale.
As the new owner, you're on the hook to pay those back taxes and other legal/governmental fees.
4. You're Supporting Big Business - Not Local Agents
Finally, if you choose to spend your money on a foreclosure, you're putting money back in the big banks' pockets. And if the Wells Fargo fiasco taught us anything, it's the banks don't have the consumers best interest at heart.
Do you know who does care about the buyer? Real Estate agents. They may work for a branch of a national company, but you're still stimulating the local economy by using them.
You're also missing out on the other aspects of having an agent, like finding the perfect home with the right features for your family. Nor can they tell you what living in that neighborhood is really like, from their years of experience.
To Buy a Foreclosure or Not to Buy: That Is the Question
We tried our best to lay out the facts and stay objective when it comes to the pros and cons of buying a foreclosure. If we learned a little away from the idea, it's just because there's so much risk involved.
But if risk is what you like and you're okay with the cons, go ahead and check out a local auction.
If the cons in this "what is a foreclosure" guide are a deal breaker for you, then we can help. We specialize in only listing the best homes represented by the best real estate agents.
Wand video tours of the home, not just still shots? We have that too. Start looking here.