Purchasing a Foreclosed Or Distressed Home: the Pros and Cons

Money-savvy consumers across the country have been figuring out ways to capitalize on the depressed housing market, from buying cheap vacation spots to purchasing foreclosed homes, fixing them up and converting them into rental properties. Though the current foreclosure crisis presents plenty of opportunity to buy properties for pennies on the dollar, consumers still need to arm themselves with as much information about buying foreclosed homes as possible, because purchasing foreclosed properties is often far from easy.

Here are some of the advantages and disadvantages of buying a foreclosed home.

Advantages:

• Foreclosed homes often go for super-low prices because lenders and homeowners are simply interested in minimizing losses. Most will end up losing money in the process, but taking a small loss is better than losing everything. This translates to homes selling at prices that are far below their appraised market value. So, the number one advantage: cheap homes!
  
  
• Because the real estate sector is so depressed, and the number of homes in foreclosure is high, consumers have a lot of properties to choose from. If one deal doesn't pan out, a bargain hunter can simply continue shopping for another favorable deal.
  
  
• In many parts of the nation, sliding home values are not expected reverse course any time soon. However, a diligent bargain hunter can often find a foreclosed home at a very reduced price, buy it, and realize immediate equity. Immediate equity -- buying a property at a price that's below the property's appraised value -- is extremely advantageous in any economic environment, and greatly benefits all types of homebuyers, be it the professional real estate investor or the consumer who's buying his or her first home.
  
  

Disadvantages:

• Though the national unemployment rate is likely to top 10% in coming months, and the U.S. economy is not likely to return to prosperity any time soon, many Americans made a lot of money during the recent credit/housing boom, and continue to do well today by e.g. investing in recession-friendly stocks, shorting stocks, etc. That translates to competition for high quality properties that are selling at firesale prices, especially in respectable neighborhoods. Homebuyers should assume that they will have to contend with at least some competition for that perfect foreclosed home in that lovely neighborhood, that's selling at a once-in-a-lifetime price.
  
  
  
• Contrary to what many consumers think, foreclosed properties aren't sold on a first-come, first-served basis. When buying a non-foreclosed home, the buyer can simply make an offer on a property, and the seller can simply accept it. When buying a foreclosed home, the buyer typically has to wait for the property to go to auction before he or she can make an offer. The auction setting provides for a far more efficient marketplace, which means that the buyer is somewhat less likely to get the home they want at the price they want.
  
  
• It may be cost-prohibitive to make necessary repairs, especially if the owner lost interest in the home as a result of financial hardship. Some people, when they find out they are about to lose their home, stop caring about the maintenance of the property. Some spiteful homeowners even damage their own property on purpose: a senseless response to the realization that the homeowner is powerless to save his or her home. Moreover, estimating repair costs can be quite difficult, because, in most instances, a homebuyer won't be able to inspect a home before it goes on the auction block.
  
  
• Even after foreclosure, some homeowners just don't want to let go. Whether the cause is an emotional attachment to a home, or just plain stubbornness, getting a previous owner out of the place can be difficult. Sometimes formal (and very time consuming) eviction proceedings are necessary to wrest the current resident from a home. No one wants to put a family out on the street, but it's important to remember that no matter what you do, the financial institution holding the note is going to use force to evict them eventually.
  
  

No matter what kind of home you buy, you need to do as much research as you possibly can. What kind of neighborhood is it in? How are the schools, roads, and general environment? Is the lifestyle in the area a good fit for you? Those are just some of the questions you should be asking yourself.

Also, remember that sometimes the repairs and other expenses involved in buying a foreclosed home can make it almost as expensive as buying a home at full-price, so be prepared to be disciplined about sticking to your budget. And don't make the mistake of paying more than you wanted to because you got caught up in the frenzy of a bidding war. Emotional bidding is a rookie mistake that could end up costing you thousands.