Is there a downside to buying a foreclosed property?

Posted by  on Jan 20, 2015

Q: Is there any downside to buying a foreclosed home?

A: Along with nearly the lowest mortgage rates on record, a huge inventory of distressed properties has helped home buyers get some great bargains in recent years. While that inventory has started to decline, it is still much bigger than it was before the housing crisis. This is a double-edged sword: foreclosures can create bargains, but they can also cause problems for particular properties and whole neighborhoods.

So the irony about foreclosures is that they can both destabilize the property market and make bargains available. You can improve your chances of ending up on the right side of that trade-off if you examine three key questions about any specific foreclosed property you are considering buying:

  1. Is there an excess of foreclosed properties in the neighborhood? If you see more than, say, one on every block, you should be concerned about whether this will remain a viable residential area. Abandoned houses are magnets for criminal activity, and neglected properties quickly become an eyesore.
  2. Has this particular property suffered from neglect? Speaking of neglect, people facing foreclosure are not typically concerned with maintaining the property -- and sometimes they actively sabotage it. Make a thorough inspection to see if there has been any meaningful damage.
  3. Can I comfortably afford the mortgage loan? You may think you are snapping up a bargain, but don't go in with the idea of quickly flipping a house for a profit. An ongoing inventory of foreclosed homes can delay price recoveries, so make sure you can afford to own the house for the long haul.

In essence, you can benefit from buying a foreclosed property if you can get a bargain price without experiencing any of the damaging impacts of foreclosure, either in terms of the property itself or the neighborhood at large. In addition, you should make sure you are comfortable enough with the payments that you won't become part of the foreclosure problem yourself in a couple of years.


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