Advantages and Disadvantages of Buying a Home in Foreclosure (2023)

You don't have to know a lot about real estate to know that a motivated seller can mean a lower price for the buyer. But buying a foreclosure can be unpredictable and risky, and it takes flexibility and patience. Learn the upsides and downsides of buying a foreclosure, where to find them and how to know whether you're getting a good deal.

Foreclosure in a Nutshell

Foreclosure is an often-lengthy legal process when a bank or lender repossesses a home in which the homeowner has defaulted on the payments. The bank takes ownership of the home and then sells it at auction. Foreclosure commonly comes about because a homeowner has failed to make mortgage payments, but it can happen for other reasons too, like unpaid property taxes. There are two types of foreclosure — judicial and nonjudicial — and both federal and state law, as well as the homeowner's own mortgage documents, dictate the process and timeline.

From a purchaser's perspective, foreclosure has three distinct stages: pre-foreclosure, auction and post-foreclosure. Homes can be purchased during any of those three stages. During the pre-foreclosure period, you are purchasing from a struggling homeowner trying to fend off foreclosure. In the other two stages, you are working with a bank that has wound up with a property on its ledgers instead of a mortgage. The home's location, the reason it's in foreclosure and where it is in the foreclosure process all affect a buyer, because these details confer certain rights on the homeowner, and create potential complications for the prospective sale.

The Good and the Bad

Each foreclosure stage holds distinct advantages and disadvantages for a purchaser, which we will summarize before digging a little deeper into some of the risks.


This stage includes a months-long missed-payments period before the lender has initiated foreclosure, and the period after the initial notice or lawsuit has been filed when the seller faces a countdown to the auction.

(Video) BEWARE: Watch This Before Buying a Foreclosed Home + Pros & Cons


  • Bargaining power: If the seller isn't underwater on the mortgage, he or she may be motivated to achieve a fast sale and more likely to do repairs and provide price concessions during this period. If it is a short sale, the purchase price will be less than the seller owes on the mortgage. The seller and the lender may be actively trying to avoid a foreclosure and thus motivated to make a concession on the price. For more on this topic, see our article on short sale purchases.
  • Condition and title knowledge: The seller must give a complete history of the property's condition. The buyer can do normal title searches and obtain desired inspections within the standard due diligence contingency period.
  • Financing flexibility: The buyer can use regular mortgage financing and the seller may even be willing to work out alternative mortgage financing in the form of a lease-purchase agreement or mortgage assumption.


  • Price: Early in the game, the price may not be below market. If the seller is underwater and seeking a short sale, the seller's lender must agree and will negotiate for fair market value.
  • Condition: If the homeowner is in financial trouble, there's a good chance the home has deferred maintenance. A short sale property is generally sold as-is.
  • Lack of certainty and timeframe: Sellers may back out of a transaction if their financial situation improves. It can take a long time to negotiate with lenders, dragging out the process and sometimes nixing the sale altogether. The seller still has to move out and could be struggling with options for relocation.


At this point, the seller hasn't been able to rectify the situation, so the lender is permitted to auction off the property to recoup what it is owed. Since the lender can't profit from the foreclosure at auction, the bidding will start at the outstanding balance of the mortgage and fees, or sometimes less, to encourage bidding.


  • Price: You could get the property for substantially below market value.
  • Time: You don't have to spend weeks or months in negotiations like in pre-foreclosure purchases.
  • Lack of competition: Most auctions require cash bids, and this requirement could amount to slimmer competition at this stage more than any other.


(Video) Buying A Foreclosure House! Should you Buy A Foreclosed Home? The Pros & Cons

  • Financing inflexibility and price: Only cash offers are accepted. You're on your own; no commissions will be paid to a buyer's representative. There may be auction fees.
  • Condition and title knowledge: An as-is sale means the bank cannot provide disclosures as to property history or condition, and often inspections are not allowed. The buyer must also research the title before the auction and any liens or back taxes owed will be the responsibility of the buyer.
  • Time: The previous homeowner may still have to move out and could be struggling with options for relocation.


If the home doesn’t sell at auction, it becomes a bank-owned or real estate owned (REO) property, and the lender can sell it in the general real estate market or at a later REO auction.


  • Financing flexibility: The purchaser can use regular mortgage financing and the sale has a normal closing period.
  • Price, bargaining power and concessions: The bank will pay the real estate agent's commission and may make further concessions (on the price, down payment, closing costs, escrow length) to get the property off its books. For some federal mortgage defaults, there may be special programs for owner-occupier purchasers to reduce price and competition substantially.
  • Condition and title knowledge: The title will be clear, and the purchaser can get the usual inspections. The home is likely vacant.


  • Condition knowledge: The property is still an as-is sale, where the lender cannot provide disclosures as to property history or condition.

A little more on the downside
Despite the rock-bottom-prices hype, the market influences the price of foreclosures just like everything else; when there are a slew of them and not enough buyers, you can get a great deal on price. But when there aren't that many or everyone wants one, the price goes up and there may not be enough savings in the price to offset the financial risks.

And the risks are there. First and foremost is property condition: If the previous homeowners weren't able to make mortgage payments, there is a good chance they deferred home maintenance too. For properties that have been abandoned for a period of time, there may be leaks, problems with mold and vandalism, sometimes from the resentful prior owner. Those repair costs can be massive.

(Video) What are the advantages and disadvantages of buying a foreclosed property? Welch realtor explains!

Another major issue could be additional liens, mortgages or back taxes on the property. Though these balances aren't your financial responsibility in pre-foreclosure purchases, they could complicate the purchase by increasing the amount owed by the seller and adding additional parties (read: time) to negotiations in short sales, in which each of the seller's lienholders must approve the sale. For an auction buy, secondary liens and mortgages constitute a very unwelcome surprise because the purchaser is responsible for it all, underscoring the importance of a comprehensive title search before auction and then title insurance as soon as possible after the auction.

Other problems that may affect your bottom line revolve around laws in your jurisdiction. You can have problems getting tenants, squatters and even the previous homeowner out of the property. In judicial foreclosure, the former owner is generally evicted as part of the court judgment but in nonjudicial foreclosure, the lender or purchaser of the home might have to get a separate Notice to Quit or file eviction proceedings. That means time, attorney's fees and possibly new property condition issues. Sometimes a buyer will propose a cash-for-keys deal, essentially paying the previous owner to leave and to do so nicely.

Another related issue is the right of redemption, explains mortgage lender Rocket Mortgage by Quicken Loans in its guide to buying a foreclosed home. You may go to the trouble of buying a home to have to turn around and sell the property right back to the former owner. This right exists up to the point of sale in all states, and even for a period after auction in some states. Additionally, in states with this right after auction, sometimes the previous homeowner can legally remain in the property during the right-of-redemption period.

Realizing that some of these pitfalls are largely issues with auctions and REOs, pre-foreclosure purchases start seeming pretty attractive: You are able to know the most about the property history and it has a higher likelihood of being in good condition. But foreclosure is a series of steps, not a one-day event, and during the pre-foreclosure period, the homeowner often has months to rectify his or her situation, meaning you spend time, effort and often cash working toward a sale that may not go through.

How to Know Whether a Foreclosure Is a Good Deal

A lot of the deal in a foreclosure comes down to you the buyer and the property's condition.

Do you have people who can fill in your gaps in knowledge or skill?
If you are purchasing the property at a time when you are able to examine it, don't skip thorough inspections. You may not be able to inspect a property up for auction, but that doesn't mean you can't do a little private detective work to give you an idea of what you may be getting into. Drive by the property to get a sense of the neighborhood and to check the home's condition from the road. Zillow also recommends checking for the assessed value for property taxes to see if it's substantially less than others in the area, a possible indication of hidden issues. Get a trusted contractor or handyman to give an estimate on repairs — both in terms of money and time.

In addition to your construction crew, you should enlist the help of an experienced real estate agent — one with expertise in foreclosures and distressed properties. This person can help you find properties before and after they hit the auction block as well as help you compare property prices in your area to see which ones actually constitute a good deal.

(Video) Is Buying A Foreclosure A Good Idea

Are you buying the home as an investment property or to live in?
If you're considering the property as an investment to flip, start with the 70% rule. This commonly used guideline says to calculate 70% of the total price the home could sell for once it is fixed up, and then subtract the repair costs. That amount is the most you should pay. Obviously, making this calculation is difficult if you can't inspect the property because you may have only a glancing notion of what you're getting into for the repair bill. Err on the side of caution.

Owner-occupiers and first-time buyers may be able to avail themselves of incentives to purchase foreclosures through special mortgage rates and discounts. For example, HUD offers a rotating cast of properties in revitalization areas through their Good Neighbor Next Door program for a whopping 50% off if you fall into one of their special employment categories and commit to living in the property for three years.

Flipping a house comes with big risks, big rewards and big questions. Wondering where to buy and how much to DIY? Property expert Egypt Sherrod shares her top rules for first-time flippers.

How to Find Foreclosures

Where to look for properties varies by the stage of foreclosure.

(Video) What is the disadvantage of buying a foreclosed home?
  • County Records: Once the foreclosure process has been initiated, it is a matter of public record, as is the notice of sale for an upcoming auction, so there should be a record filed with your county courthouse. Check your state laws covering the foreclosure notification process to find out exactly where to look. You can also check the county mortgage records for what is owed on the property.
  • Local News Sources: Those initial foreclosure filings are often published in the local newspaper, as are auction notices. You may also find out that a homeowner is in financial trouble in the missed-payments period through word-of-mouth or social media.
  • The MLS: The MLS will have pre-foreclosures and REOs. Homeowners that are in the missed-payments stage aren't technically in foreclosure yet, so you may never know the homeowner is in trouble by a real estate listing, but a real estate agent can often see what is owed on the property on the MLS.
  • Online Real Estate Marketplaces: Pre-foreclosures and REOs can be found on real estate websites like Zillow. Pre-foreclosure properties will be designated by a bunch of different terms, according to Freddie Mac. Those listed as short sale, pre-approved by bank, subject to bank approval, third-party review required are properties where more is owed on the mortgage than the purchase price. The first two could be surer bets because the seller's bank is already on board with the sale. Also, some properties marked pre-foreclosure aren't even for sale; the price is simply an estimate based on area sales data and it was included on the website because there's a public notice on file. RealtyTrac offers a free search of foreclosures at all stages, with detailed info through a subscription service.
  • Loan Servicing Companies: REOs can also be found on some of the major loan service company websites. Bank of America and Wells Fargo, among others, have searchable lists of the properties on their books.
  • Federal Government: The federal government has several places to look for auctions and REOs. HUD ends up with properties from defaulted FHA loans as do Freddie Mac and Fanny Mae. Their First Look Program gives preferential treatment to owner-occupiers via the opportunity to purchase for a period of time before investors are able to make an offer. The IRS, the US Marshals and other federal agencies have auction sites for homes they ended up with through seizure and forfeiture instead of mortgage default. HUD has a useful clearinghouse page linking to all the places to find government properties.


What are some advantages and disadvantages to buying a foreclosed home? ›

Key Takeaways
  • Buying a foreclosed property can be a cheaper and faster way to invest in real estate.
  • You will not likely be able to inspect a home under foreclosure prior to buying it, and it may need serious repairs.
  • The market for foreclosures is competitive, and you'll need cash upfront to use at auction.
Oct 24, 2021

What are the disadvantages of buying a foreclosed house? ›

The Cons of Buying Foreclosed Property

Foreclosed properties are often in poor condition and may require extensive and expensive renovations. It's important to thoroughly research the property as well. Are there any outstanding liens on the property you'd be responsible for paying for?

What makes buying a foreclosed property risky answer? ›

A common risk when buying a foreclosed property is paying more than the current market value of the home. This risk increases if you are buying at an auction where competing buyers may “spite bid” to drive the price higher.

How do I purchase a foreclosed home in Michigan? ›

Steps to buying a home
  1. Initial consultation with a loan officer.
  2. Get a Mortgage pre-approval.
  3. Place an offer on a home.
  4. Start a mortgage application.
  5. Submit documents to underwriting.
  6. Complete home inspections and the Home Appraisal.
  7. Schedule the closing with your Realtor and the home sellers.

What is a disadvantage to a deed acquired in foreclosure? ›

Drawbacks Of A Deed In Lieu

No guarantee of acceptance: Your lender isn't obligated to accept your deed in lieu of foreclosure. Your credit will still take a hit: While a deed in lieu arrangement won't harm your credit as drastically as a foreclosure, you can still expect your score to drop.

What are advantages of buying a house? ›

Here are seven benefits of owning a home:
  • More stable housing costs.
  • An appreciating investment.
  • Opportunity to build equity.
  • A source of ready cash.
  • Tax advantages.
  • Helps build credit.
  • Freedom to personalize.
Feb 9, 2023

What are the advantages of foreclosure? ›

Advantages. The main advantage of choosing a foreclosed home is a lower sales price. Foreclosures give buyers an opportunity to purchase a home below the average market value. Banks generally aren't interested in holding on to foreclosed properties, which tends to make them motivated sellers.

What makes buying a foreclosed property risky quizlet? ›

Foreclosed properties are relatively on sale at a lower price, however, they are sold in an “as is” basis. It means that the seller will not make any further development or improvements in the property once sale is finalized.

What is worse than foreclosure? ›

But bankruptcy is worse. Going through a foreclosure tends to lower your scores by at least 100 points or so.

How does foreclosure affect your future? ›

Unfortunately, a foreclosure hurts your credit score, which means that it will be harder and sometimes impossible to get credit cards and loans in the coming years and that you can expect to pay higher interest rates.

What is one of the negative features of foreclosure? ›

the borrower loses all equity, even if the sale yields more than the amount owed. the process happens so quickly that the borrower has no time to cure the problem. the borrower's credit is damaged, making it difficult to purchase another home.

Why do people lose their homes to foreclosure? ›

If you do not make your mortgage payments, your lender can take your home. The process they use to take your home is called foreclosure. In the process of foreclosure, the lender sells the property to recover its loan balance when the homeowner is no longer able to make the payments.

What is the redemption period for foreclosure in Michigan? ›

Michigan's Foreclosure Law includes a six-month redemption period (12 months for agricultural property that is larger than three acres) for homeowners whose homes have sold at a foreclosure sale.

How does a foreclosure sale work in Michigan? ›

In Michigan, most foreclosures are done without going to court. Foreclosure starts when your lender says it will exercise its right to sell your property unless you catch up on your payments or make other arrangements with it. Your lender is the bank or company that holds the mortgage on your house.

What is a sheriff deed in Michigan? ›

A sheriff's deed is the deed given at a sheriff's sale when the foreclosure of a mortgage has taken place. Once the sale has taken place, the sheriff's deed is recorded in the Register of Deeds Office.

What is a friendly foreclosure? ›

The Friendly Foreclosure Strategy is a partnership between homeowners and investors. The investor agrees to bid at the foreclosure auction and hopefully win with a great discount.

What are the disadvantages of a deed? ›

If you're the buyer in a contract for deed arrangement, you need to be aware of the following risks.
  • Property maintenance. One contract for deed drawback is the uncertainty over who's responsible for what. ...
  • No foreclosure protection. ...
  • Balloon payment. ...
  • Seller retains title. ...
  • Less consumer protection.

What is the consequence of foreclosure? ›

A foreclosure won't ruin your credit forever, but it will have a considerable impact on your credit scores, as well as your ability to qualify for another mortgage. Also, a foreclosure could impact your ability to get other forms of credit, like a car loan, and affect the interest rate you receive as well.

What are the 3 most important things when buying a house? ›

The Location

They say the three most important things to think about when buying a home are location, location, location. You can change almost everything else, but you can't change your home's location.

What are 4 advantages of owning a home? ›

4 Benefits of Owning a Home
  • You Can Build Equity Over Time. Equity is the difference between how much your home is worth and how much you owe on your mortgage. ...
  • Your Monthly Payments Can Be Stable. ...
  • Owning a Home May Offer Tax Benefits. ...
  • You Can Create the Home You Want.
Aug 25, 2022

What are two advantages of buying? ›

The 5 Key Benefits of Effective Buying
  • 1 - Reduced price or total cost. ...
  • 2 - Securing greater value from the supplier or the supply base. ...
  • 3 - Reduced risk. ...
  • 4 - Innovation. ...
  • 5 - Improved internal effectiveness.
Aug 10, 2018

Is loan foreclosure good or bad? ›

Having a foreclosure on your credit report can have a major negative impact on your credit score and affect your ability to obtain loans or new loans over many years. When a borrower defaults on their loan payments, a mortgage lender may seize control of the property.

Which type of foreclosure is faster? ›

Nonjudicial foreclosures can be a faster process than judicial foreclosures as they do not involve having to go to court.

What is the most common reason for a foreclosure? ›

Major reasons for foreclosures are:

Job loss or reduction in income. Debt, particularly credit card debt. Medical emergency or illness resulting in a lot of medical debt. Divorce, or death of a spouse or partner who contributed income.

Why is buying a house a risk? ›

Buying a house naturally involves certain risks. So long as one is able to meet the mortgage payments, whether due in installments or in one sum, all is well. But if the payments can't be made, one has to face the possibility of foreclosure and the loss of the entire investment.

What makes buying a foreclosed home risky select two? ›

The title fee is set later and can't be negotiated They're usually sold “as is” Usually, you can't inspect the home in advance You must use an adjustable-rate loan for purchase.

How much does foreclosure affect credit score? ›

Some homeowners with strong credit scores may see their scores drop by as much as 100 points or more after suffering a foreclosure. Homeowners with lower credit scores may see a smaller decline, but only because there's less room to fall.

How many people are in danger of foreclosure? ›

Nearly 1 Million Americans Fear They'll Need to Leave Their Home Due to Foreclosure in the Near Future.

Is a foreclosure worse than a short sale? ›

Short sales don't damage credit ratings as much as foreclosures—but they are still negative credit marks. Foreclosures have a much more negative impact, because they generally stay on credit reports for seven years. Consumer Financial Protection Bureau.

How many years does a foreclosure affect you? ›

Foreclosure information generally remains in your credit report for seven years from the date of the foreclosure. Even if you have a bad credit history or a low credit score, you may qualify for an Federal Housing Administration (FHA) loan.

How hard is it to recover from foreclosure? ›

It can take anywhere from three to seven years to fully recover. A low credit score due to foreclosure can result in expensive interest rates and limited credit, making financial recovery difficult.

Can you recover from a foreclosure? ›

Foreclosures may remain on your credit report for seven years, but maintaining payments on your other credit accounts during those seven years will help balance out the negative entry. Make sure you pay your bills on time, in full and consider applying for a credit card that can help you bounce back.

What is a major disadvantage to wonders of accepting a deed in lieu of foreclosure? ›

The primary disadvantage to the borrower is the loss of the property, the income from the property, and the borrower's investment in the property. The conveyance of the property is also taxable.

What is the first item to be paid out of foreclosure funds? ›

The order of payment in a foreclosure is; the cost of the sale (advertising, attorney fees, trustee fees, etc.), any special assessment taxes and general taxes, the first mortgage, whatever is recorded next.

Why is a foreclosure more likely to have title issues? ›

Why is a foreclosure more likely to have title issues than a non-foreclosure? Borrowers who are in foreclosure are permitted to acquire unrecorded liens. Borrowers who can't afford loan payments may have taken out other loans against the property.

Why are foreclosed properties risky? ›

When you buy a foreclosed property, you're buying it “as-is.” This means that you're responsible for any and all repairs that need to be made. In some cases, the previous owners may have caused extensive damage to the property before they were foreclosed on.

How many Americans are behind on mortgage payments? ›

4% of people are behind on their mortgage payments.

Are fewer families facing foreclosure today than before the pandemic? ›

The number of single-family homes entering foreclosure in June 2020 decreased by 85 percent when compared to the same month in 2019, before the pandemic. Indeed, in the first quarter following passage of the Act (Q2 2020), filings plunged to their lowest level since 2005.

How many years behind before property taxes are foreclosed in Michigan? ›

Real property tax delinquency entails a three-year forfeiture and foreclosure process in Michigan. Parcels are forfeited to the county treasurers when the real property taxes are in the second year of delinquency.

How many months behind before you go into foreclosure? ›

In general, mortgage companies start foreclosure processes about 3-6 months after the first missed mortgage payment. Late fees are charged after 10-15 days, however, most mortgage companies recognize that homeowners may be facing short-term financial hardships.

Can you stop a foreclosure in Michigan? ›

Chapter 13 Debt Consolidation

Filing a Chapter 13 Bankruptcy will legally stop the foreclosure sale immediately and set up reasonable repayment terms. Plan also allows you to remove second mortgage(s)and/or home equity loans to rebalance your home's value relative to current market conditions.

How many missed payments before foreclosure in Michigan? ›

Under federal law, the servicer usually can't officially begin a foreclosure until you're more than 120 days past due on payments, subject to a few exceptions. (12 C.F.R. § 1024.41). This 120-day period provides most homeowners with ample opportunity to submit a loss mitigation application to the servicer.

What is the statute of limitations on foreclosure in Michigan? ›

600.5803 Foreclosure of mortgages.

Sec. 5803. No person shall bring or maintain any action or proceeding to foreclose a mortgage on real estate unless he commences the action or proceeding within 15 years after the mortgage becomes due or within 15 years after the last payment was made on the mortgage.

What is a quit deed in Michigan? ›

What Is a Quitclaim Deed? A quitclaim deed is a document that transfers ownership of a property from a grantor to a grantee. Unlike covenant or warranty deeds, quitclaim deeds do not ensure a clear title. Having no guarantee means the grantor is not liable for any problems or claims that may arise after the transfer.

How do I stop a sheriff sale in Michigan? ›

Options to Prevent the Sheriff's Sale
  1. A repayment plan, making a larger payment until you are caught up.
  2. Forbearance, or a temporary pause in payments.
  3. A loan modification to lower your monthly mortgage payment.
  4. A deferral of the past due amount to the end of the loan.
Jun 23, 2021

What is a quit claim deed for property in Michigan? ›

A quitclaim deed does not make any promises that the seller owns the property or has clear title to it. A quitclaim deed only passes the interest in the property that the seller actually has, without any guarantee. The seller is not responsible to the buyer for a defect in the title.

What is risky about foreclosure? ›

In some cases, a foreclosed property may have been uninhabited for years. This can lead to a number of problems, such as vandalism, squatters, and structural damage. You may need to spend a lot of money on repairs just to make the property livable again.

How badly does foreclosure affect credit? ›

Record of a foreclosure remains on your credit report for seven years from the date of the first missed mortgage payment that led to the foreclosure action. In addition to loss of the home, it can have long-lasting negative effects on the mortgage borrower's credit and ability to secure a new loan.

What are the emotional effects of foreclosure? ›

Among all 21 studies based on individual-level data, the personal experience of home foreclosure was associated with worsened outcomes including depression, anxiety, alcohol use, psychological distress, and suicide.

What is the best alternative to foreclosure? ›

Your mortgage servicer might offer the following options as an alternative to foreclosure:
  • Forbearance. This option temporarily suspends payments, allowing you time to make up the shortfall. ...
  • Repayment Plan. ...
  • Loan Modification. ...
  • Refinance. ...
  • Partial Claim. ...
  • Forgiving a Payment.


1. Advantages & Disadvantages of Foreclosure
(ExpertVillage Leaf Group)
2. Pros And Cons Of Buying A Foreclosed Home
(Dan Barcelon - Long Beach Homes and Real Estate)
3. The Advantages and Disadvantages of Buying REO
(Dan Croke)
4. What the heck are FORECLOSURE sales? Pros and Cons of buying a Foreclosure property?
(Your DMV Team Realty)
5. Pros and Cons to Buying a Foreclosure
(Nick Macy)
6. Pros And Cons Of Buying A Foreclosure I


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