If you’re looking to get a great deal on a home or getting into house flipping it’s natural to take a hard look at foreclosure properties due to the often discounted prices. A foreclosed home is a house that belongs to the bank after someone fails to make payments and the tenants are subsequently removed from the home. Yes, you can get a great deal on a foreclosure but there are some serious pitfalls and may turn out to be a nightmare. So is buying a foreclosed home really worth it?

Is a foreclosure actually cheaper?

When a house is foreclosed on it is ultimately owned by the bank. It can take up to several months or even years to complete this process. Once the home is owned by the bank then it will either go up for auction or get sold outright. As long as the bank owns the home it’s no longer receiving payments and they simply want to get the property sold as quickly as possible to recoup the losses. The longer it sits on the market the cheaper the property will tend to be. If you home is in the process of foreclosure and the tenants are still there then perhaps it is a better idea to speak with the current owner directly. No one wants to be foreclosed on and they may give you an even better deal in order to get out from under this debt. Not to mention you will have a better opportunity to get proper inspections done. So, YES, a foreclosure will likely be cheaper than a standard home sale within the same neighborhood. But the buying price is not the only cost when it comes to purchasing a foreclosure and there are several more risks involved. 

What are you doing with the home?

When buying a home, in particular a foreclosure, it needs to be factored in on what this property will be used for. Is this a rental property, a flip or is this going to be your forever family home? Knowing this will help you determine your ultimate budget and what you’re willing to spend. If the home is a flip then obviously you have to not only have enough money to buy but also repair as well as leave room left over to make a significant profit. If this is rental property then you can save quite a bit in repairs by spending less for cheaper upgrades such as countertops, light fixtures, etc. If it is the place where you plan on living there for the next 10-20 years then maybe you will be willing to do more extensive renovations and upgrades. But before ever considering a foreclosure understand that the “WHY” behind your purchase matters significantly. 

Plan to make repairs

Typically when a home has been foreclosed and put on the market it is sold “AS IS”. Meaning, no home repairs will be done to the home prior to sale. This home could be seething with potential disaster for you, your family or your budget. If you’re buying from an auction you’re usually buying completely site unseen with no inspection or even being allowed in the home. If you buy straight off the market or through an agent you can hire and should hire an inspector to look at the home but in many instances the seller or bank in this case won’t even turn on the utilities to check so this could be a huge problem. There could be structural issues as well as plumbing, electrical, HVAC units, things that could significantly set you back and these repairs should be factored into the overall cost. So if the home is $20k under priced compared to neighboring comps but will cost $40k to repair this is not a good deal. You WILL have to make repairs to a foreclosed home but it’s just a matter of how many and how much. On another note when people are foreclosed and forced out of their home it can be a traumatic experience. There have been plenty of formal tenants who have cut wires, punched holes in the walls, poured cement into the plumbing pipes, some horrible things to deal with if you’re needing to make repairs, all to get “revenge” on the bank. There can also be squatters who break into and have lived on the property uninvited and completely destroy the place. So when you’re buying a foreclosure you must plan for significant repairs. 

So how much should I offer for a foreclosure home?

When buying real estate we have to remember that this is an INVESTMENT. So in order for it to be a good investment we need to get a good deal. You always make money in real estate at the “buy”. But a good metric to use when buying a property foreclosure to ensure you get a “good deal” is to budget 80% of the appraised value minus total cost of repairs. So what does that mean? The simple formula is (APPRAISAL VALUE x .80 - REPAIR COSTS)This means that if a house is worth $200K and your estimated repairs are $20k that formula would look like: $200k x .80 = $160k - $20k which your offer should be $140,000. This formula isn’t iron clad but it is a good frame of reference and it's a good idea to stay within this ballpark. 

So, should you buy a foreclosed home?

If all of a sudden you spot a great foreclosure deal and you do your research understanding the “why” and how much repairs will cost and get it for the appropriate price then a foreclosure is an incredible opportunity. Real estate can be an amazing investment but that all hinges on the type of deal you get. If you do your homework and budget appropriately then investing in a foreclosure property can be the way to go.