With the housing bubble burst and the subprime mortgage crisis, millions of homeowners found themselves unable to make their mortgage payments. Many found themselves owing more on the house than the home was worth. Many just walked away from their homes. As a result of these complicated issues, millions of homes were foreclosed.
While this isn’t the only reason for which homes are foreclosed, it has been a widespread one. With all the foreclosed properties, there has also been extensive interest in buying these properties at a bargain price.
It is true that foreclosed properties can be priced at a significant discount, but they are also a much riskier investment. Before making an offer on a foreclosed property, do your due diligence.
Things you must do before buying a foreclosure:
Do a title search - make sure that when you purchase a foreclosure that you are the only person who has any ownership claim
Check for liens - find out if there are any liens against the property because you will be responsible for paying them
Check for a second mortgage - you don’t want to be surprised by an extra mortgage that you will need to pay
Know how good of a “bargain” you’re getting - foreclosures are sold “as is” and in many cases you will not be able to do a proper inspection. You may end up paying thousands of dollars repairing the property before it is fit to be lived in.
It is also important to consider that there are different types of foreclosure properties and each type comes with its own advantages and disadvantages. The different types of foreclosure purchases are:
Pre-foreclosure
Auction
Real Estate Owned (REO), also called “bank owned”
Pre-Foreclosure
A pre-foreclosure is when you buy the home directly from the homeowner, before the bank officially forecloses. This type of purchase does not require as much capital as other foreclosures. Also, since you are purchasing straight from the homeowner, you will be able to gather all of the necessary information, such as inspection reports, title information, etc. that may not be available with other foreclosure properties. Once you take over the mortgage, you will be responsible for all future payments as well as any overdue back payments.
Auction
A foreclosure property will usually end up at an auction. Real estate auction practices vary by state but common practice is for the auction to be held on courthouse steps, in front of the foreclosed home, or at the county clerk’s office.
Real estate auctions offer the best chance for a great deal but also hold the greatest risk. Auction properties are sold as is, with no opportunity for potential buyers to perform inspections. When buying a home at auction, the buyer must pay cash, usually a cashiers’ check. It is also possible that there may still be tenants living in the home. In such a case, you would be responsible for the often costly eviction process.
REO
Once a foreclosure has gone to auction and failed to sell, it becomes a Real Estate Owned, or bank owned, property. Most homes do not sell at auction, most fail to even get any bids.
An REO property is the least likely of the foreclosure properties to represent a bargain, but it is also the least risky. The property can be fully inspected, any title issues can be found and dealt with, and the sale can be subject to a mortgage. REO properties also tend to be in better condition than other foreclosure properties.
Another thing to keep in mind when purchasing a foreclosure is that some states have a redemption period that allows the original owner to buy back the property by paying the remaining balance owed. You may be able to have this redemption period waived, so check the state laws on this topic before purchasing.
Still interested in buying a foreclosure property? If so, always do your research before purchasing!
FAQ’s:
What is a foreclosure home?
A foreclosure home is a property that has been repossessed by a lender after the homeowner failed to make mortgage payments. These homes are often sold to recover the unpaid loan balance and can sometimes be purchased below market value.
Are foreclosure homes really cheaper?
Yes, foreclosure homes can be priced below market value, making them attractive to buyers looking for a deal. However, the lower price often comes with higher risks, repair costs, and limited disclosures.
What are the risks of buying a foreclosure?
Buying a foreclosure can involve several risks, including:
Hidden property damage
Outstanding liens or unpaid debts
Limited or no inspections
Title complications
Occupied properties requiring eviction
Due diligence is critical before making an offer.
What should I check before buying a foreclosure?
Before purchasing a foreclosure, you should:
Perform a title search to confirm ownership
Check for liens or unpaid debts
Verify if there’s a second mortgage
Estimate repair and renovation costs
Understand the property is often sold “as-is”
Skipping these steps can lead to unexpected expenses.
What does “as-is” mean in foreclosure sales?
“As-is” means the property is sold in its current condition, with no guarantees or repairs made by the seller. Buyers are responsible for any issues discovered after purchase.
What are the different types of foreclosure properties?
There are three main types of foreclosure purchases:
1. Pre-Foreclosure
You buy directly from the homeowner before the bank repossesses the property. This option allows for more transparency, access to inspections, and potentially easier negotiations.
2. Auction (Sheriff Sale or Trustee Sale)
Foreclosures sold at auction often offer the lowest prices—but come with the highest risk. These typically require cash payments and may not allow inspections.
3. REO (Real Estate Owned / Bank-Owned)
These are properties owned by the bank after failing to sell at auction. REO homes are usually the safest foreclosure option because:
Inspections are typically allowed
Title issues are resolved
Financing is often available
Which type of foreclosure is best for buyers?
For most buyers, REO (bank-owned) properties offer the best balance of value and reduced risk. Auctions may offer bigger discounts but require experience and cash, while pre-foreclosures provide more negotiation opportunities.
Can I finance a foreclosure property?
It depends on the type:
Pre-foreclosure: Often financeable
Auction: Usually requires cash
REO: Typically eligible for traditional financing
Always confirm with your lender before pursuing a property.
What is a redemption period in foreclosure?
A redemption period is a timeframe in some states that allows the original homeowner to reclaim the property by paying off the debt. Buyers should understand local laws, as this can impact ownership rights after purchase.
Do foreclosure homes need repairs?
Most foreclosure homes require some level of repair or renovation. Many have been vacant or neglected, so it’s important to budget for potential upgrades and unexpected issues.
Is buying a foreclosure a good investment?
It can be—but only with proper research and guidance. Foreclosures can offer great value, but they’re not always a “deal” once repair costs and risks are considered.