Buying a Foreclosed Home: Your Way Into the Real Estate Market?

Learn about the risks associated with buying a foreclosed home at each stage of the foreclosure process.

With record levels of foreclosures having hit the real estate market in recent years, potential buyers feel they've spotted an enticing opportunity. But buying a foreclosed home is fraught with risks. Before you jump on the bandwagon, learn whether you're a good candidate to do so, as well as the risks and benefits of buying at each stage of the foreclosure process.

Whether or not you should consider buying a foreclosed home depends on several factors, including your homeownership experience, your financial situation, and whether you have access to professionals with experience buying foreclosed properties. Ask yourself the following questions:

Do You Have Prior Homeownership Experience?

Think hard before making a foreclosure purchase your first home buy. Owning and maintaining any home presents challenges -- and a foreclosure home may be in a serious state of disrepair and come with legal concerns that make regular homeownership look like a walk in the park. It helps to have already learned the many lessons about the true cost (in time and money) of owning a home (beyond the monthly mortgage payment) and to have developed relationships with home contractors and other professionals who can help you.

Will This Be Your Primary Home or an Investment Property?

If you're buying the foreclosure for investment purposes, realize that the finances may not be as simple as they first appear. For starters, you probably can't count on fixing up the place and then flipping it at a profit -- the level of repairs required, plus the fact that in areas with bargain foreclosures, home prices may not bounce back for some time, means you'll have to make sure you can profitably rent the place for some years to come. To learn more about buying foreclosed homes to serve as rental properties, read Nolo's article Buying a Foreclosed Home as a Rental Property.

How Solid Is Your Financial Situation?

A foreclosure deal may be loaded with surprise expenses. Even before you begin to negotiate, the homework necessary to research the market and property can cost you. More significantly, foreclosed properties were often neglected for months by struggling homeowners or even trashed when the frustrated owners were forced to leave. And if the property has been sitting empty, there's a chance it's fallen prey to thieves, vandals, and squatters. Stealing copper pipes and fixtures has become a popular pastime in areas with many foreclosed homes.

Such properties also can come with titles encumbered by judgments, liens, and other attachments that you may have to pay off to seal the deal. Finally, a surfeit of foreclosures typically signals a declining market with the inherent risk of property value declines yet to come. You should have the financial wherewithal to see you through to the next upturn.

Existing or prior home ownership can give you the equity stake you need to cover foreclosure purchase costs, provided you have a solid equity position available in your primary residence. Otherwise, some source of liquid cash to tap, along with low debt and outstanding credit, are all essential.

Do You Have Access to Experienced Professionals?

The arcane foreclosure system is populated with professionals who've learned the ropes. Unless you are likewise endowed with foreclosure acumen, get one or more experienced professionals on your side.

You'll need competent assistance from a real estate agent, attorney, investor, or other professional familiar with local laws and the real estate market, specifically as they apply to your market's foreclosure system. Your point person should also have ample connections with other savvy professionals, such as a home inspector, appraiser, and perhaps a general contractor. (For information on hiring a real estate agent, read Nolo's article Choosing Your Real Estate Agent.)

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