Should I buy a foreclosed home?
For the right buyer, getting a foreclosed home can be an amazing deal.
You can likely purchase a foreclosed house at a major discount, fix it up, and then live in it or sell it for a tidy profit.
But new research suggests it’s getting harder to find foreclosure bargains. There just aren’t as many on the market as there used to be.
So, is it worth it to try to find and purchase a foreclosed home?
That all depends on where you find one and how good of a deal you can get if you finance it.
Where to find foreclosed homes for sale today
A fresh study by ATTOM Data Solutions turned up some interesting news on foreclosures.
The study found that more than 1.5 million U.S. homes were vacant in the fourth quarter of 2019. But only 288,000 homes were actually in the process of foreclosure.
“Zombie foreclosure is...when a home is left vacant by homeowners who incorrectly believe they have to immediately move out after receiving a foreclosure notice, thinking that the foreclosing lender is now responsible for the property” —Investopedia
In addition, the percentage of “zombie foreclosures” — which are essentially abandoned homes — has dropped to 2.96% of all foreclosed homes. That’s down from 4.7% in 2016 and 3.2% in Q3 2019.
ATTOM’s study also found that zombie foreclosure rates are highest in:
- Washington, D.C. — 10.5%
Kansas — 7.9%
Oregon — 7.9%
Montana — 7.4%
Maine — 6.7%
New Mexico — 5.8%
The states with the highest actual number of zombie properties include:
- New York — 2,266 properties
- Florida — 1,461 properties
- Illinois — 892 properties
- Ohio — 823 properties
- New Jersey — 398 properties
And among zip codes with a population of 10,000 or more and least 1,000 vacant properties, the highest rates of zombie properties were concentrated in:
- Flint, Michigan — 31.2% vacancy rate
- Greater Chicago area — 28.3% vacancy rate
- Hilton Head, South Carolina — 25.9% vacancy rate
- Cleveland, Ohio — 18.6% vacancy rate
- Indianapolis, Indiana — 17.6% vacancy rate
- St. Louis, Missouri — 17.3% vacancy rate
So if you’re looking for a deal on a foreclosed home, these are the likeliest places to start looking.
Pros and cons of buying a foreclosed home
Foreclosure properties are enticing because they can often be had at a bargain.
That’s especially true at a time when home prices continue to increase every year.
But buying a foreclosed home also comes with some extra risk.
“Buyers usually can’t enter these properties to do an inspection. And they may be required to pay cash at the auction rather than take a mortgage loan.” —Rick Sharga, President and CEO, CJ Patrick Company
“Typically, they can’t be purchased the same way as traditional homes are bought,” says Rick Sharga, president and CEO of CJ Patrick Company
“For example, many foreclosures are purchased at live auctions held at the local courthouse. Buyers usually can’t enter these properties to do an inspection. And they may be required to pay cash at the auction rather than take a mortgage loan.”
What’s more, foreclosed homes usually haven’t been well maintained. So it’s easy for a buyer to underestimate the expense needed to do the necessary repair work.
“There can also be outstanding liens that the buyer may unwittingly become responsible for — mechanics liens, HOA dues, taxes, etcetera,” adds Sharga.
How to find a foreclosed home
The first challenge is finding foreclosed homes near you. To help in your hunt, try these tips:
- Enlist the help of a real estate agent who is experienced with foreclosure purchases
- Check in with your county. County offices may post current foreclosure listings and weekly sales
- Scour bank websites. Bank-owned properties for sale are often posted online
- Search for homes for sale through the Department of Housing and Urban Development
- Check out online auction websites like Auction.com, Xome.com, and Hubzu.com
Unless you’ve bought a foreclosed home before, we’d recommend speaking with a professional before doing so. It can be a very complicated process to navigate.
That’s especially for a “zombie properties,” which will likely still have documentation in the previous owner’s name.
How to buy a foreclosed home
When it comes to paying for a foreclosure home, your options are fairly limited.
Ways to finance a foreclosed home purchase:
- With the help of a mortgage broker
- With cash at a bank or auction
- Using a hard-money loan
- FHA 203k repair loan
- Freddie Mac CHOICERenovation loan
- Other mortgage options may be available
“Many foreclosed homes can only be purchased with cash,” notes Sharga. “Or you may want to work with a mortgage broker. This expert may have various loan products available from multiple lenders.”
These can include private lenders who provide “hard money” loans. The latter can serve as bridge financing while you fix and flip a foreclosure property.
“Hard money financing is readily available today at far more reasonable rates than many years ago,” suggests Realtor and attorney Bruce Ailion.
“You can buy a foreclosed home as-is with a hard money loan, repair it, and then refinance with a conventional loan at a lower interest rate.”
But wait, you ask: Can you buy a foreclosed home with an FHA loan?
Yes. This is possible with an FHA 203k loan. It enables you to finance the purchase and rehab of a foreclosure fixer-upper.
“Look closer at programs like the FHA 203k loan or Freddie Mac’s CHOICERenovation loan,” Sharga recommends. “These loans allow you to build repair costs into the amount of the mortgage loan.”
What fewer foreclosures means for the housing market
In the report, Todd Teta, chief product officer with ATTOM Data Solutions, explained these results.
“One of the most visible signs of the housing market crash during the Great Recession keeps receding into the past,” he said.
Pockets of zombie foreclosures linger, of course. But “neighborhoods throughout the country are confronting fewer and fewer of the empty, decaying properties that were symbolic of the fallout from the housing market crash during the recession,” Teta added.
Sharga says it’s surprising that we’re still seeing zombie foreclosures today.
“These are typically the result of foreclosure processes that have dragged on,” says Sharga. “They’ve dragged on so long that the borrower has opted to leave the property before it is sold at auction or repossessed by the lender.
Why it’s getting harder to find foreclosures
The reason it’s tougher to find foreclosure bargains nowadays is simple.
“There simply aren’t very many homes in foreclosure today. That’s especially true in markets where demand from homebuyers is greater than the supply of homes for sale,” Sharga adds.
To put things in perspective, Sharga says that, in a normal market, around 4% of mortgages are in some stage of delinquency. Another 1% are in foreclosure.
“At the peak of the foreclosure crisis, about 12% of mortgages were delinquent and 4% were in foreclosure. So there was a record number of distressed properties flooding the market. But today, only slightly more than one-half of 1% of mortgages are in foreclosure,” Sharga notes.
A big reason for this? Lenders have tightened their requirements over the years.
“It’s been incredibly difficult for all but the most well-qualified borrowers to get a mortgage loan,” says Sharga.
Plus, home prices have continued to rise. That’s led to record levels of homeowner equity.
“Having more equity enables distressed homeowners to execute a sale to avoid losing their home to foreclosure,” explains Sharga.
“There’s an ebb and flow in real estate, as in stocks,” says Ailion. “When the market is strong, it’s hard to find a bargain. Where the perceived bargains are is where the highest risks are located. And that’s true of foreclosure properties, too.”
Find a bargain on a foreclosed home
Today’s low mortgage rates make home buying more affordable. In turn, that means there are fewer homes going into foreclosure.
But there’s a flip side.
If you can find a foreclosed home and finance it, you could get a ridiculously good deal in today’s low-rate environment.
The trick is to have a low rate in hand so that you can lock once you find the property you’re looking for. You can start right here.