What Is a Foreclosure Property?

Definition and Examples of a Foreclosure Property

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Foreclosure is the process of a lender seizing and selling a property to a new buyer when borrowers fail to make their mortgage payments as agreed. It enables the lender to recover at least some of the remaining mortgage balance.

The timeline and legal process for foreclosure can vary from state to state, but the end result is the same: The mortgage borrower loses their home. 

What Is a Foreclosure?

A mortgage forms a lien against property, giving lenders the legal right to move in and take ownership in the event that the borrower defaults. The lender will then almost invariably sell the property to recoup financial losses on the home after it takes control of it. Investors and consumers can purchase these homes, often at auctions or directly from the bank or government agency that owns them.

How Does Foreclosure Work?

Foreclosures typically occur because the homeowner has failed to make agreed-upon payments on the mortgage, but the reasons behind nonpayment can vary. Sometimes job or income loss is the culprit, or a borrower might find that medical bills or credit card debt make it impossible for them to stay afloat. Foreclosure can be the result of bankruptcy, divorce, or disability.

Graphic Showing Reasons Sellers Go Into Foreclosure
the balance

Foreclosures must advance through judicial proceedings in some states before the home can be taken, but other states offer non-judicial options. 

A foreclosure can't legally be initiated until a borrower is at least 120 days behind on their mortgage payments.

Pros and Cons of Buying Foreclosed Property

Most buyers consider buying a foreclosed property to save money. Not all bank-owned and foreclosed properties are a bargain, but many are priced at less 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) even has homes listed at $1.

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

That might be where the perks end, however. Foreclosed properties are often in poor condition and require many repairs that the seller is unwilling or unable to make. Most are sold as-is. A majority of property auctions require cash to purchase the home, so you might not be able to finance the purchase via a traditional mortgage loan.

Pros
  • May be priced lower than other homes on the market

Cons
  • Properties are often poorly maintained or in disrepair


  • Sellers are often unwilling or unable to make repairs

  • Previous homeowner might be able to take the home back in some cases

  • Could require significant amounts of cash if purchased at auction

  • No record of property repairs and maintenance

Finally, there are concerns regarding the previous homeowners:

  • Many states have what are called “right of redemption” periods that allow homeowners to catch up on payments and take back their properties.
  • The previous homeowner might "squat" in the home, and it could be a difficult and time-consuming process to remove them. 
  • The previous homeowner isn't directly involved with the sale, so it can be 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.

You’re typically purchasing from a large financial institution like a bank or a private lender when you buy a foreclosure, so offers usually require multiple approvals and might 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. Banks are looking to recoup as much of their losses as possible, so they’ll usually present a counteroffer during negotiations which must be approved by several people.

You can include a home inspection contingency and negotiate on repairs and pricing based on the inspection’s findings when you're purchasing in a traditional home sale. Individual buyer contingencies (and thus the negotiations based on them) aren't allowed when buying a foreclosed property at auction.

Key Takeaways

  • Foreclosures occur when a homeowner stops paying their mortgage and falls more than 120 days behind on the loan.
  • Banks and government agencies claim these properties then sell them to recoup their financial losses on them.
  • You can purchase foreclosed properties at auction or directly from banks and agencies.
  • It’s often harder and more time-consuming to negotiate a foreclosure purchase due to corporate bank involvement, but you'll probably pay less.

Article Sources

  1. Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed Aug. 5, 2020.

  2. Consumer Financial Protection Bureau. "I Can’t Make My Mortgage Payments. How Long Will It Take Before I’ll Face Foreclosure?" Accessed Aug. 5, 2020.

  3. Homebuying Institute. "How to Buy a Foreclosure Home." Accessed Aug. 5, 2020.

  4. HUD. "Dollar Homes." Accessed Aug. 5, 2020.

  5. Wells Fargo. "Buying a Foreclosure." Accessed Aug. 5, 2020.