Buying real estate in foreclosure can be a smart move but it can also be a risky one. Before you decide to buy real estate that is in foreclosure, you really need to know exactly what you’re getting yourself into. Let’s take a look at what buying foreclosed real estate means, what it involves and the pros and cons involved so that you can make an informed decision that is right for you.

How Do Foreclosures Work?

When a homeowner stops making payments on their home, after a certain amount of time the home will go into foreclosure. Buying a house in foreclosure can be a good option but it can also be a big headache. Few people choose to go into foreclosure. Usually, something has happened that prevents the homeowner from making their payments on time. They may have lost their job, had a reduction in wages, or just not been able to make their payments due to a build up of debt. In most cases, the home will either wind up being auctioned off or sold for fair market price.

What Does Buying Real Estate in Foreclosure Mean?

When you buy real estate that has been foreclosed on, it basically means you are buying property that someone else has failed to make the required payments on. The process for buying real estate in foreclosure is quite different than the process for buying other types of real estate and that process definitely isn’t for everyone. We’ll talk a bit more about that in a moment. Basically though, there are only minor difference between foreclosed on real estate and normal real estate even though the process is different.

What Is Involved in Buying Real Estate in Foreclosure?

You have a few different options when you’re looking to buy real estate in foreclosure. I’m not going to get into the process in detail here but I’ll go over a few of your basic options. If you’re interested in buying real estate in foreclosure, I would highly recommend talking to a reputable lawyer in your area that specializes in real estate. The process can vary fairly significantly from state to state and even financial institution to financial institution. Your real estate lawyer will help you understand what is involved in buying real estate that has been foreclosed on in your area and will help you find viable options close to you. If you’re interested in buying real estate outside of your city or state, speak to a lawyer in that area to make sure the information you’re getting is correct. Oftentimes, real estate agents are most familiar with the rules and regulations on their own turf so speaking with someone that lives and works in your desired city is the best option.

When it comes to buying real estate in foreclosure, there are a few options available as I mentioned above. First, you can buy try to buy directly from the owner before the foreclosure proceedings have started or reached a certain point. Again, the regulations here vary from state to state so you’ll need to talk to a real estate lawyer in your area (or in your desired area) to get the information you need here. Buying directly from the homeowner can be hard for reasons beyond red tape. You’re going to a homeowner who is in distress and that can feel opportunistic to say the least. Not everyone has that “it’s just business” attitude and that’s not necessarily a bad thing. You’re going to be taking a home from a family and while you’re helping them avoid a long, drawn out foreclosure that could cause a lot of embarrassment, it can be hard to reconcile those guilty feelings. That’s not a bad thing, necessarily. It just means you may want to avoid this particular option.

You also have the option of buying foreclosed real estate at trustee sales. Trustee sales can be great but they do have their own unique challenges. We’ll get into those a bit more in a few moments. If you want to buy foreclosed real estate though and you don’t want to approach a homeowner directly, a trustee sale could be your best option. You can also speak with a local real estate agent about properties in foreclosure to see what you can find.

What Are the Advantages of Buying Foreclosed Real Estate?

Buying foreclosed real estate means getting the property at a significantly reduced price. This can mean you can get everything you’re looking for at a fraction of what it would normally cost. At a foreclosure auction, the bank will sell the property for balance owed on the mortgage by the previous owner. While sometimes the money you will save isn’t as much as one would expect, it is often below fair market value. In addition, competition at this type of auction is usually pretty thin. You’ll need a cash payment to get the home and that isn’t something many people are willing or able to offer. If you are willing and able, you have a decent shot at winning the auction.

Post-foreclosure houses (auctions in which the bank has taken possession of the home) or REO (Real Estate Owned By Lender) sales are a great way to get a fantastic price on property. Lenders often just want to sell the house and are willing to negotiate on nearly all aspects of the sale including the asking price, the closing costs, down payment and the length that the sale remains in escrow. You also will not take on any liens, back taxes or mortgage costs incurred by the previous owner which is something you will sometimes face in foreclosure auctions. Post-foreclosure houses are also already vacant by the time you take possession of the home. This means you don’t have to worry about displacing a family or dealing with various issues that can come up with evictions. They take about as long as escrow on a normal house and you don’t have to worry about paying commission to a real estate agent.

What Are the Disadvantages of Buying Foreclosed Real Estate?

Clearly foreclosure auctions and post-foreclosure houses are a great option if you’re looking for a lot with a modest amount of money. Often you can get pretty much all of the items on your wants and needs list with a post-foreclosure house but at a fraction of the cost. It’s important to point out the disadvantages of these types of sales though because they are fairly big disadvantages. The disadvantages are different between foreclosure auctions and post-foreclosure sales so let’s talk about them separately.

There are actually quite a few disadvantages with buying a house at a foreclosure auction and they’re pretty significant disadvantages at that. Many potential buyers will steer clear of foreclosure auctions for that exact reason. Probably the biggest problem with foreclosure auctions is the lack of information a buyer is able to get about their purchase. You are not allowed to inspect the home (or hire an inspector to inspect the home) prior to purchasing it. You also need to buy the home in cash which just isn’t realistic for many of us. Another serious disadvantage is that the property may not come with a clean title. If you buy a house at a foreclosure auction, you really need to research that house beforehand as much as you can. If there are liens, back taxes or mortgages, you will assume responsibility for all of that when you take over the title. You will also be responsible for paying commissions or hiring your own representation. Finally, a buyer should be prepared for angry home owners to take their anger out on their house. Property damage isn’t all that uncommon when homes are foreclosed on.

There aren’t quite as many issues with post-foreclosure sales, making them a much more appealing option for the average home buyer. There are still some disadvantages you should be aware of though. First and foremost, the property you purchase will be purchased as is. Any repairs that need to be made to the home will be your responsibility. There is also a bit of additional paperwork you’ll need to take care of but all in all, post-foreclosure sales are a decent option if you’re okay with spending a little additional money (or, to be fair, sometimes a lot of additional money) on repairs. Often, the money you spend on repairs or renovations combined with the price you paid for the house still works out to be less than what you would’ve paid for the same house under normal conditions so it’s definitely an option worth considering.