Should you buy a foreclosed home?

home in foreclosure
That stately home looks like a great deal, but since it's a foreclosure, it may be ridden with damage. See more real estate pictures.
Ariel Skelley/Getty Images

Interest rates are low, foreclosed properties are plentiful, and it's a buyer's market -- so, should you buy a foreclosed home? You've got to know what you're doing and pick the right house if you don't want to lose to your shirt (and your savings). Whether you want to fix up and flip the house or are just looking for a bargain-priced place to hang your hat, here's what you need to know.

The first and arguably most important issue to consider when looking for a bargain-basement buy on a foreclosed home is the property's condition. Most residents of foreclosed homes are none too happy about their eviction, and many physically take out their discontent on the house itself. Missing plumbing, holes in walls and broken appliances are all common, and as many as half of all foreclosed properties have major damages from a former owner. Even if there's no intentional damage, foreclosing on a home is a lengthy process -- often taking a year or longer -- so it's pretty much guaranteed that the property hasn't been properly kept up for at least 12 months. Many foreclosed homes have serious issues like cracked foundations or leaky roofs that can be quite costly to repair.

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Because you're not the only bargain hunter out there, you're going to have to move fast to secure a property, leaving little time for a proper home inspection. In fact, many people buy foreclosed homes at auctions, sight unseen. That's a risky gamble for a company or a wealthy investor, but it can be disastrous for someone who's hoping to make a quick profit by flipping the house or for budget-minded home shoppers.

Say you find the perfect foreclosed property -- you need to come up with a way to pay for it all. Even if you've got a good job and a great credit score, financing a foreclosed home can be extremely difficult. Many houses bought at auctions have to be paid for in full within 24 hours. You might be able to get financing for a loan under normal circumstances, but it's tough to come up with that kind of cash on such short notice.

Now, this only applies to those looking to flip the property, but you need to realize your great fixer-upper could take a while to sell. Home sales aren't exactly breaking records right now (at least, not in a good way), so even if you find a house at a great price and fixing it up is as cost-effective as you could hope for it to be, it could sit on the market for months, maybe even for a year or two. During this time, you'll be the one paying for utilities, taxes and insurance, all of which will severely cut into your profit margin.

What's the verdict? Buying a foreclosed home can be risky, and you might be better off buying a house without all the troubled history. It's a buyer's market for those too, you know.

 

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Related HowStuffWorks Articles

  • Bankrate. "The Safest Ways to Buy Foreclosures." MSN. 2010. (March 12, 2010).http://articles.moneycentral.msn.com/Investing/RealEstate/TheSafestWaysToBuyForeclosures.aspx?page=1
  • Herigstad, Sally. "Should You Buy a Foreclosure?" MSN. 2010. (March 12, 2010).http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/should-you-buy-a-foreclosure.aspx
  • Owers, Paul. "Some Ex-Owners Trashing Their Foreclosed Homes." Sun-Sentinel.
  • April 8, 2008. (Mar. 12, 2010).http://www.sun-sentinel.com/business/realestate/sfl-0408foreclosedtrashing,0,3688930.story
  • Todorova, Aleksandra. "Should You Buy a Foreclosed Property?" SmartMoney.
  • July 26, 2006. (March 12, 2010).http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/should-you-buy-a-foreclosure.aspx
  • Yager, Fred. "Buying a Home in Foreclosure: What You Need to Know." Consumer Affairs. April 23, 2007. (March 12, 2010).http://www.consumeraffairs.com/news04/2007/04/buying_foreclosure.html
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