Dear 100 Hour Board,
I'm trying to learn about the home-buying process. I've noticed looking in places like Zillow.com that foreclosed homes usually are pretty cheap. It seems to me initially that this is a great deal: a $250,000 for $170,000 instead? Awesome! But is there more to it than that? Do you really get a house for that big of a discount? Is looking specifically for foreclosures a good strategy in finding a home? (I guess that makes me realize I'm not sure all the reasons why a home would be foreclosed on in the first place - finances are the main reason, right?)
I just bought a home so I know a little bit about the home-buying process. However, I didn't buy a foreclosed home, so what I know is what I've been able to find online and from home-buying TV shows. If you want really good information, you should talk to a realtor, and if possible find one that specializes in foreclosures.
Foreclosures are bank-owned properties that have been repossessed because the homeowner has defaulted on a mortgage. This means that they haven't made regular, satisfactory payments to the mortgage lender. If you miss a few months worth of payments, you will be served a Notice of Default, and you will have a certain amount of time (such as 90 days) to repay the balance in full, including any penalties, to ensure the property is not foreclosed. Once that time period is up, the bank takes possession of the house and sells it to recoup losses.
The reason for a foreclosure is that a homeowner with a home loan can't or won't make the mortgage payments. There are several reasons why this can happen. First, the homeowner may try to sell the house, but cannot sell it for more than the remaining balance on the loan. This can happen if the value of the home has depreciated for whatever reason, such as in the recent housing recession. Therefore, they give up and stop making payments. Second, the homeowner took out a loan that was too big for them. They probably shouldn't have qualified for the loan they received, but the lender gave it to them anyway. Eventually, it becomes apparent that the buyer cannot make the payments, so they default. This was a big reason for the recent housing recession and subsequent strict lending rules. Third, if the homeowner loses their job then it may be impossible for them to make the mortgage payments, and the house is foreclosed. Last, other personal reasons, such as illness, divorce, gambling, or addictions can interfere with the ability to make mortgage payments.
So why are some foreclosures relatively inexpensive? Because the bank may not be trying to sell the house for market value, which in your example is $250,000, but for the remaining balance on the loan, which is $170,000 (because the original homeowners put money down and paid some of the loan back already). Another reason is because the previous homeowners may have left the home in disrepair, or the house may have sat vacant for months, leading to maintenance problems and/or thievery. Foreclosed houses are sold "as is," and the bank will not repair these problems for the next homeowners. One last reason for a low asking price is a move to start a bidding war, where they receive multiple offers for the property and use that as leverage to drive up the home's selling price.
So you can get a good deal buying a foreclosure, but there are risks. First, you have to understand that buying a foreclosed property can take longer than buying a non-foreclosed property because you're dealing with the bank rather than another homeowner. If you put in an offer, it can take a while to get the bank to respond. It can also take longer to close on the house because of all the extra people and paperwork involved. If you're in a hurry to move, a foreclosure may not be your best bet.
Second, even though the home's price is low, you may have to deal with maintenance issues. This could be as simple as some paint and cleaning, but it could be as bad as water or structural damage. Even with big issues, you could still get a good deal, provided you're prepared to pay for the repairs. If possible, make sure you see the property in person before you buy, and if you put in an offer, make it contingent on a home inspection free of expensive repairs. Hopefully that would catch the worst problems so that you know about them before you commit to buying.
Last, you could find yourself in a bidding war, where multiple parties have put in offers on the same property. This could drive up the home price, and it can be disheartening to lose a house that you really love.
If you feel like you can deal with all of that, then buying a foreclosed home could be right for you. However, make sure you have a good realtor on your side! Their expertise is well worth it in this situation.