Whether you’re a first-time homebuyer looking for an affordable property or an investor hoping to flip houses for profit, buying a foreclosure home is an appealing option on the surface. The below-market prices on foreclosure homes can mean a big payday for investors. Plus, for those looking to make the house their long-term home, it may help you avoid busting your budget.
However, while buying a foreclosure in NY or anywhere else can be rewarding, there are also notable risks. Before you move forward with buying or flipping foreclosed houses, here’s what you need to know.
The Benefits and Drawbacks of Buying a Foreclosure Home
Before you make a purchase, it’s important to weigh the buying a foreclosed home pros and cons regardless of whether you want to move into the house or are looking to flip foreclosed homes. The same is true of flipping or buying foreclosed land.
By balancing the potential rewards with the possible problems with buying foreclosed homes, you can determine whether it’s the right option for you. Here’s what you need to know.
The Rewards of Buying a Foreclosure Home
Below-Market Sale Prices
In the vast majority of cases, the most attractive part of buying foreclosed homes to flip or live in is the below-market price tag. Often, the cost is far lower than other comparables (or comps) in the area.
The price is lower because a foreclosure seller isn’t necessarily trying to generate a profit. Instead, the goal is to recoup what’s owed on the mortgage and potentially cover certain administrative expenses and fees related to managing and selling the home.
Negotiation Leverage
At times, buying a bank-owned home or other foreclosure property gives the buyer more leverage. With government or lender-owned properties, the goal is to sell and recoup enough to cover the remaining debt quickly. As a result, they may accept any offer that accomplishes that objective.
The same is true for pre-foreclosure houses, as the seller is trying to offload the property quickly. Sellers may entertain any offer that’s high enough to cover the remaining debt and handle any related seller expenses.
It’s important to note that negotiating on short sales can be tricky. While the lender agreed to accept less than what the seller currently owes, they do want to recoup as much as possible. As a result, offers far lower than the listed price may get rejected.
Room for Updates
Since the cost of a foreclosure home is usually lower, buyers may be able to direct some funds toward upgrades and repairs. That’s critical for investors looking at buying foreclosure property to flip. However, it’s valuable to aspiring homeowners, too, as it can allow them to turn the house into their dream home with greater ease.
Profits or Equity
Since foreclosures usually cost less, that leaves room for potential profits for investors or more equity for homeowners. Along with providing some peace of mind, it reduces the risks of possibly having to sell the home in the near future.
The Risk of Buying Foreclosure Homes
Poor Condition
There’s a reason foreclosure homes are referred to as “distressed properties.” In many cases, foreclosures have been vacant for some time, or the current owner is unable to maintain the property. As a result, they often fall into disrepair and may even be deemed unlivable in their current state.
Repair Costs
Traditionally, buying property in foreclosure means purchasing the house as-is. The seller typically won’t handle any repair costs, even if the home is uninhabitable in its current condition. As a result, buyers must take on those expenses, which can add up incredibly quickly.
Surprise Expenses
In some cases, buyers may also face a range of surprise expenses when buying a foreclosure home. Two prime examples are back taxes and liens. Depending on how the sale moves forward, buyers may be responsible for covering those costs. Generally, that’s most common with auctions, but it can happen in other situations, too.
Slow Sales
The process of buying a foreclosed home is far slower than a traditional sale. In some cases, it can take up to 90 days to hear back on an offer. Negotiating and other steps can add weeks or months to the timeline. The only exception is auctions, which move forward quickly once the sale occurs.
Fierce Competition
Foreclosures are preferred targets for many investors and flippers. As a result, competition for the highest potential properties is fierce. In some cases, that can drive the price up quickly – potentially to the point of eliminating any equity or profit potential – as bidding wars aren’t uncommon.
Frequently Asked Questions About Buying a Foreclosure Home
Are There Different Types of Foreclosure Homes?
Yes, there are actually five different types of foreclosure homes. First, there are pre-foreclosure properties. With this, the lender has notified the homeowner that foreclosure is imminent. Homeowners may then try to sell the house to avoid foreclosure.
Next, there are short sales, a situation where the lender allows the borrower to sell a property for less than what is owed. Usually, homeowners are already in default when they make these arrangements and are typically underwater.
Another type is the sheriff’s sale auction. These usually occur at courthouses and are a quick way for lenders to recoup funds after a borrower defaults.
Then, there are bank-owned properties. Also called real estate-owned (REO) properties, these are the homes that didn’t sell at auction. The lender owns them, so buying REO properties involves working with a lender as the seller.
Finally, there are government-owned foreclosures. These occur when a government-guaranteed loan goes into default, causing them to be repossessed by the federal government. Generally, government-registered brokers manage these sales on behalf of federal agencies.
Is Buying a Foreclosure Cheaper?
Buying a foreclosure property is typically cheaper when it comes to the actual home sale price. Often, foreclosures are listed at well below market value, which is what makes buying a foreclosed home to flip or live in so attractive.
However, the total cost can meet or exceed market value depending on any required repairs or improvements. Many distressed properties aren’t in great condition. As a result, whether you’re buying and flipping foreclosed homes or want to live in the house after the purchase, you need to factor in the cost of repairs and updates to determine if the total cost is less.
Can You Get a Loan for a Foreclosure?
If you’re wondering whether you can get a loan for a foreclosure or asking, “Can you buy a pre-foreclosure home with a loan?” the answer is potentially “yes.” However, you must also ensure the house meets all other eligibility criteria for the specific loan type.
For anyone asking, “Can you buy a foreclosed home with a conventional loan?” the house’s condition is a big factor. The same is true for many other loan types, such as specific FHA, USDA, and VA loans. Some mortgages can only be used on homes deemed habitable. If the property doesn’t meet the habitability criteria, you may have to look for alternative financing, such as a rehab loan.
Can You Buy a Foreclosed Home with an FHA Loan? What About Conventional, VA, or USDA Loans?
Generally speaking, buying a foreclosure with an FHA loan is an option if the lender considers the home livable in its current condition. The same is true of conventional, VA, or USDA loans.
If a home isn’t in habitable condition, you may have to use alternative forms of financing. The most classic example is a rehab loan, which is designed to cover the house’s cost and any needed improvements.
It is important to note that buying a house at auction with a loan isn’t easy, and it may even be impossible at certain auctions. Generally, auctions require cash payments. As a result, if you’re wondering how to get a loan for a foreclosure auction, you’ll usually need a non-mortgage loan – such as a personal loan – secured in advance. That way, you can pay in cash (or, more commonly, with a cashier’s check) once the auction is over.
Is Buying a Foreclosure a Good Idea in NY?
If you’re trying to answer the question, “Is buying a foreclosure a bad idea or a good one?” the answer is, “it depends.” Generally, if you’re interested in buying foreclosed homes in NY, you need to look at all the pros and cons. Additionally, estimating potential repair costs and ensuring the title is clean is essential, allowing you to determine how much you’ll need to spend beyond the sale price.
If buying a foreclosed home in NY is your goal, make sure you work with a Realtor®. That way, you have an expert by your side who can help you navigate the process.
