What is a Foreclosure Property, and Should You Buy One?

These properties are eventually sold off to help the lender recoup its losses

A home in foreclosure.
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When mortgage borrowers fail to make their monthly payments as agreed upon, a lender may seize their property and sell it to a new buyer to help recover the mortgage balance. This is called a foreclosure. 

Foreclosure Definition

Foreclosures occur due to nonpayment, and though the process and timelines vary by state, the end result is the same: The mortgage borrower loses his or her home. 

Once the lender takes control of the property, it can sell it off to make up for financial losses on the home. Investors and consumers can purchase these homes—often at auctions or directly from the bank or government agency that owns them.

Why Foreclosures Happen

Foreclosures, at their most basic, occur because the homeowner has failed to make agreed-upon payments with their mortgage lender. The reasons behind this nonpayment can vary. 

Sometimes, job or income loss is the culprit; for other borrowers, medical bills or credit card debt made it impossible to stay afloat. In some cases, it may be due to bankruptcy, divorce, disability, or other personal or financial issues.

Graphic Showing Reasons Sellers Go Into Foreclosure
the balance

Pros & Cons of Foreclosed Property

Pros

  • May be priced lower than other homes on the market

Cons

  • Properties are often poorly maintained or in disrepair


  • Sellers are often unwilling to make repairs

  • Previous homeowner may take the home back, in some cases

  • Could require significant amounts of cash if purchased at auction

  • No record of property repairs and maintenance

Most buyers consider buying a foreclosed property to save money. Though not all bank-owned and foreclosed properties are a bargain, many are priced lower than market value due to their condition or the lender’s need to recoup their financial losses quickly. The Department of Housing and Urban Development (HUD), for example, even has homes listed at $1

Buying a foreclosed property may allow you to purchase a home you might not otherwise have been able to afford—perhaps one in an in-demand area or with more square footage than you budgeted for.

That’s about where the perks end, though. Foreclosed properties often come in poor condition and require many repairs—repairs the seller is typically unwilling to make (the majority are sold as-is). Additionally, you may not be able to finance the purchase via a traditional mortgage loan, especially if you buy it at auction. In most cases, property auctions require all-cash bids.

Finally, there are concerns regarding the previous homeowners. These include:

  • Redemption periods. Many states have what’s called a “right of redemption” period, which allows the homeowner to catch up on payments and take back his or her property. 
  • Squatters. If the previous homeowner (or anyone, for that matter) is squatting in the home, it may be difficult and time-consuming to remove them. 
  • Lack of maintenance records. Because the previous homeowner is not directly involved with the sale, it can be very difficult to know what repairs and maintenance have been done to the house before you move in. Banks don’t have a record of this type of upkeep.

Stages of Foreclosure

The actual foreclosure process that a lender must go through to seize a property varies by state. In some places, foreclosures must advance through judicial proceedings before the home can be seized. In others, there are non-judicial options. 

Legally, a foreclosure cannot be initiated until a borrower is at least 120 days behind on their mortgage payments. 

How to Negotiate With Sellers

When buying a foreclosure, you’re often purchasing from a large financial institution like a bank or private lender. Because of this, offers usually require multiple approvals and may take longer to move through the pipeline.

You can generally expect negotiations to be slower and more difficult than they would be with a traditional seller. Additionally, banks are looking to recoup as much of their losses as possible. As such, they’ll usually present a counteroffer during negotiation which, again, must be approved by several people.

When purchasing in a traditional home sale, you can include a home inspection contingency and negotiate on repairs and pricing based on the inspection’s findings. When buying a foreclosed property at auction, individual buyer contingencies (and thus the negotiations based on them) are not allowed.

Your best bet for negotiating a foreclosure purchase is to engage a real estate agent—ideally one with foreclosure experience. He or she will be able to help you craft a competitive offer based on comparable sales and market conditions.

Key Takeaways

  • Foreclosures occur when a homeowner stops paying his or her mortgage.
  • Banks and government agencies sell foreclosed properties to recoup their financial losses on them.
  • You can purchase foreclosed properties at auction or directly from banks and agencies.
  • Although you may find a less expensive property, it’s often harder and more time-consuming to negotiate a foreclosure purchase, due to corporate bank involvement.

Article Sources

  1. Freddie Mac. "Understanding Foreclosure." Accessed March 31, 2020.

  2. Homebuying Institute. "How to Buy a Foreclosure Home." Accessed March 31, 2020.

  3. Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed March 31, 2020.