How to Buy a Foreclosed Home

10 Min Read | Published: May 29, 2024

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This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

See how to buy a foreclosed home. Learn how to find foreclosure listings, pitfalls to avoid, and steps to navigate the buying process.

At-A-Glance

  • The right foreclosed home can offer the right buyer value in some cases, but buying a foreclosure also carries a number of risks.
  • There are several different ways to buy foreclosure properties, including short sales, pre-foreclosures, and auctions.
  • When it comes to foreclosed homes, it’s important to conduct due diligence and to consider enlisting the help of a real estate attorney who can help to protect your interests.

When lenders foreclose on homes, they generally aim to sell those homes as quickly as possible. This can present a tempting offer for homebuyers who may be looking for an opportunity to secure a property at a lower price.

 

We’ve all heard of the risks associated with them, but how does buying a foreclosure work, exactly? And when is buying a foreclosure a potentially good idea and when should would-be buyers steer clear?

 

In this article, we’ll break down the process and show you how buying a foreclosure works along with important considerations that you’ll want to keep in mind.

What Is a Foreclosed Home?

A foreclosed home is a property that a bank or lender has repossessed after the previous homeowner failed to pay their mortgage. The bank or lender then aims to sell that property to access cash tied up in the property and minimize costs associated with maintaining it.


Buying a foreclosure is a bit different from the traditional home-buying process. There may be more risks associated with foreclosures, and in some cases, you may not be able to have an appraisal or inspection. Additionally, there may be hidden costs associated with the property. In some cases, you’ll need to pay all-cash for a foreclosure as the property may not be mortgageable.


However, in some cases, foreclosures can potentially offer a good opportunity for the right buyer to secure a good deal.

Different Ways to Buy a Foreclosed Home

There are several different ways to buy a foreclosure home. These include:1

  • Short Sales
    The lender sells the home for less than its outstanding mortgage balance. These are the most similar of the four foreclosure types to a traditional home sale. The borrower may not have defaulted yet but may have shown financial hardship, such as job loss, that could lead to default.
  • Auctioned Foreclosures
    Potential buyers bid for the property and the highest bidder purchases the home. Buyers get the home “as-is” without inspection and must pay cash only. This may be called a Sheriff’s Sale in some jurisdictions.
  • Pre-Foreclosures
    This is when the lender notifies the borrower that they’re in default but have not yet foreclosed and began auctioning the property.
  • Real Estate Owned (REO)
    These are properties the bank failed to sell at auction. They are also known as bank-owned properties. Given the circumstances, the bank may be inclined to offer favorable terms for these properties.
  • Government-Owned Properties
    The federal government repossesses homes purchased with federal government loans, such as the Federal Housing Administration and Department of Veterans Affairs loans. Government-registered brokers resell these to buyers on the government’s behalf.

Note that buying a foreclosure can be risky, so it’s advisable to always speak to a real estate attorney first.

Potential Benefits and Risks of Buying a Foreclosed Home

Although foreclosures come with several risks to keep in mind, there are some benefits to doing your research and finding the right property:


Benefits of Buying a Foreclosed Home:

The main benefit of buying a foreclosed home is the chance to secure a property that’s below market value. However, not all foreclosures are created equal, and it’s important to know what constitutes a good opportunity.

Could Represent

Good Value

 Foreclosed property prices tend to be below the market value to help the bank sell the property faster. Still, you must be careful that the property won’t end up costing you more in unexpected repairs.

Could Present an Opportunity to

Negotiate

 Banks may be eager to sell foreclosure homes and may be willing to make more concessions during negotiations.

Risks of Buying a Foreclosed Home:

Foreclosures come with some risks that can threaten unprepared investors. Be aware of the following potential pitfalls when considering a foreclosure purchase:2

Hidden Problems

With the Property

 Many foreclosures are sold “as-is,” meaning the lender won’t make any repairs because they don’t want to invest money in the property.

Hidden Costs With

the Property

 There may be hidden costs with a foreclosure property. For example, the home may have outstanding utility bills, liens, or back taxes.

A Potentially Slow Process

 Buying a foreclosure can take time. The bank may be juggling several foreclosures, communications could be slow, or legal hurdles could extend the process.

Potential Complications

 Given the extra risks and circumstances, foreclosure transactions tend to involve more legal procedures and paperwork. Even knowledgeable investors may want to seek the help of a real estate attorney or an experienced agent in foreclosures.

Stiff Competition

 When buying a foreclosure, you’ll be up against investors. Professional investors may have more resources and knowledge at their disposal, helping them nab good properties before you can look them over.

Given these risks, it is strongly advised to research properties thoroughly and enlist the help of a real estate attorney who can help to protect your interests and guide you through the process.

How to Buy a Foreclosed Home

If you’d like to move forward with foreclosure properties and feel that buying a foreclosed home could be the right option for you, here’s a look at some steps that you will want to take:

  • Determine What You Can Afford
    First, determine your purchase budget. Don’t just account for the purchase itself, though. Add a buffer for potential repairs and hidden costs like back taxes or outstanding utility bills.
  • Consider Enlisting a Real Estate Agent
    Agents can help you save time by hunting for a range of homes on your behalf based on your budget and other criteria. Agents with foreclosure experience are especially helpful in navigating the extra complexities of foreclosure purchases.
  • Consider Getting Pre-Approved
    Next, you’ll want to arrange financing. Some foreclosure transactions are all-cash, meaning that you won’t be able to finance them with a mortgage. However, others may allow mortgages. In this case, you’ll want to consider getting pre-approved, as this can help streamline the process and may give you additional negotiating power.
  • Look for Foreclosed Homes
    Here are some places to find foreclosures in different stages of the process:
    • Purchase at Auction
      Your county courthouse and online foreclosure auction websites may have auction opportunities.
    • Short Sales
      Banks may list their short sales on their websites. Real estate agency listings on the Multiple Listing Service (MLS) also have short sale properties.
    • Bank-Owned Properties
      Like short sales, banks may list their real estate owned (REO) properties on a specific page on their websites. Some real estate brokerages specialize in REOs, too.
    • Pre-Foreclosures
      Pre-foreclosure opportunities can be found in multiple places, including local newspapers, public records, and online real estate website directories. Some of these directories may require a paid subscription.
    • Government-Owned Properties
      Fannie Mae’s HomePath website and Freddie Mac’s HomeSteps website each list foreclosure properties. The Department of Housing and Urban Development (HUD) also lists properties.3

      Your real estate agent can help you search these locations and find potential opportunities.
  • Get an Appraisal and Have the Property Inspected
    Many foreclosure auctions don’t allow for appraisal and inspection since properties are sold immediately “as-is.” This can present a risky scenario for a would-be buyer, as you could end up with a property that may need extensive repairs. Some pre-foreclosures and short sale transactions, however, may allow for an appraisal and inspection.
  • Get the Most Up-To-Date Title Information
    Getting the more recent title information helps you to see whether the property has liens or other legal issues that could threaten your ownership of the property or lead to additional costs. You can hire a title search company or have your real estate attorney do this. In either case, they’ll review the property’s public records and identify potential title issues.4
  • Make an Offer
    After all previous preparatory steps are complete, and you’ve found a property that checks all of your boxes, it’s time to make an offer (or a bid, if you’re buying an auction property). Foreclosure transactions may offer more room for negotiations since the bank wants to offload the property. Don’t be afraid to negotiate the deal to be more favorable.

    Don’t forget to negotiate contingencies that could give you the right to back out if certain conditions are not met, such as:
    • An inspection contingency, which allows the buyer to inspect the property before the sale is finalized.
    • A financing contingency, which makes the sale conditional on the buyer’s ability to get financing.
    • A title contingency, which allows the buyer to check that the title is clear of problems.
  • Close the Deal
    Finally, it’s time to close the deal. Get in touch with your lender to finalize your loan. With financing in hand, complete the paperwork, pay closing costs, and complete the transaction. The exact process may look different depending on the type of foreclosure property that you buy. Remain diligent throughout the process and rely on your attorney and agent for any questions and concerns.

Financing Options for Foreclosed Homes

There are several financing options specifically for foreclosed homes:

  • 203(k) Loans (Federal Housing Administration - FHA)
    The FHA 203(k) loans are loans guaranteed by the FHA that allow you to finance a property’s purchase price and repairs in one loan, which can be useful when purchasing a foreclosure that needs renovations and repairs.5
  • HomePath ReadyBuyer Program (Fannie Mae)
    HomePath helps first-time homebuyers purchase Fannie-Mae-owned foreclosed properties. HomePath covers up to 3% of closing costs to help make the transaction more affordable. Buyers must complete an educational course on foreclosures with Fannie Mae to qualify.6
  • The HomeSteps Program (Freddie Mac)
    Freddie Mac’s HomeSteps program offers financing to buyers in select states who want to buy one of the foreclosed homes that it owns. One benefit of this financing is that you’re not required to buy mortgage insurance, which can represent significant savings for homebuyers.7

When Should You Avoid Buying a Foreclosed Home

Foreclosures aren’t ideal for everyone. You may want to avoid these properties in several situations:

  • If You Don’t Have a Property Improvement Budget
    Many foreclosure properties require some repairs. If you can’t budget for these, you may consider avoiding foreclosures.
  • If Your Investment Style Is Risk-Adverse
    Foreclosures generally suit people who have a larger aptitude for risk. If your investment style is more conservative, you may want to avoid foreclosures.
  • If You’d Like to Move Quickly
    With foreclosures, repairs and upgrades can take a long time. You may need to have alternative housing while the renovations are done.
  • If You Lack a Good Network
    If you lack access to a good foreclosure-focused real estate agent or attorney, you may want to avoid foreclosure properties. These professionals are key in doing due diligence and protecting yourself.
  • If You Lack Local Insights
    Knowing the local market beyond just the numbers gives you insights that a simple online listing may not. Without these insights, it may be challenging to identify a good opportunity.

Frequently Asked Questions

The Takeaway

Investing in foreclosures indeed offers opportunities to the right homebuyer, but there are also plenty of risks associated with this type of home purchase. It’s advisable to work with an experienced real estate attorney who can help you navigate the process and help to raise awareness of potential risks and pitfalls that you’ll want to avoid.

Headshot of Bradley Schnitzer

Bradley Schnitzer is a writer and email strategist who has covered personal finance and small business topics for over five years. He is passionate about personal finance and helping others understand their money.
 
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.

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