For homebuyers looking for a deal, purchasing a foreclosed home can be an appealing option since such properties often come at a lower price.

However, they also bring some unique challenges depending on their condition and when in the process you’re attempting to buy. Understanding the nuances can help you navigate the purchase smoothly and avoid common pitfalls.

Understand the types of foreclosures

In a nutshell, foreclosed properties are those that have been reclaimed by lenders due to the previous owner’s inability to keep up with mortgage payments. There are several stages in which you may be able to make a move on one:

• Preforeclosure: This is the period between a homeowner’s first missed payment on their mortgage and the initiation of the official foreclosure process. Rather than get caught up, some choose to sell at a discounted price to pay off their full debt before the deadline.
• Short sale: During preforeclosure, if the home is worth less than the balance owed but the homeowner wants to sell, it would be called a short sale. In this case, the lender must both sign off on putting the home on the market for a lower price and approve the offer to buy it, leading to a typically longer timeline than usual. (Note that no such approval is needed if the sale would cover the remaining mortgage amount.)
• Auction: When a property is foreclosed, it may be sold at a public auction to the highest bidder. The goal is to sell quickly, resulting in a competitive atmosphere, and buyers are often required to pay in cash or with a cashier’s check.
• Bank-owned properties: If a home doesn’t move at auction, it becomes real estate-owned (REO) by the bank, who may enlist a real estate agent to help sell it.
• Government-owned properties: Homes backed by government loans, including those from the FHA or VA, can similarly be bought at an auction or through an offer. These properties can be a good deal, but buying one may involve additional paperwork and specific requirements.

For more details on the foreclosure process and your options, check out this guide.

Secure financing

If you’re not paying cash, getting preapproved for a loan before shopping is crucial—even more so than with typical homebuying. It will give you leverage to compete with all-cash buyers and help show that you are serious. Many lenders also have special loan programs for distressed properties, such as FHA 203(k) loans, which allow you to finance both the purchase and any necessary renovations.

Work with an experienced real estate agent 

Navigating the foreclosure market can be tricky, so partnering with an agent who has experience in this field can be a huge advantage. They can help identify available properties, convey the risks involved, and negotiate with banks or auction houses on your behalf.

Do your due diligence

Foreclosed homes are typically sold “as is,” meaning that the seller—whether the homeowner, bank, or government agency—won’t make repairs. And because foreclosures are the result of financial issues, there’s a good chance maintenance has fallen to the wayside, leaving the property in poor condition. As such, it’s essential to:

• Review neighborhood values. Just because a home is cheaper doesn’t mean it’s a great deal. Compare similar properties in the area to ensure that you’re making a smart investment.
• Order a home inspection. Even though it won’t give you negotiating power, knowing the extent of the issues, when possible, can help you make an informed decision. However, keep in mind that some options, especially auctions, may not allow time to get an inspection, so you’ll have to weigh the risk of extensive repairs against the reward of possible savings on the purchase price.
• Check for liens or unpaid taxes. Some foreclosures may come with financial baggage, and a title search can uncover any outstanding debts tied to the property.

Make an offer and negotiate

The way you submit an offer will depend on the type of purchase you’re making. For instance:

• Preforeclosure sales: You’ll negotiate directly with the homeowner.
• Auction properties: You’ll need to follow bidding rules, which often require cash or certified funds.
• REO properties: You’ll make an offer through the bank’s listing agent, similar to a traditional home sale. However, banks may be less flexible on price negotiations.

Purchasing a foreclosed home can be a great way to find a property at a lower price, but it requires extra patience, research, and financial preparedness. If you’re up for the challenge, reach out to a qualified real estate agent to get the ball rolling. With the right guidance and strategy, your dream home could be closer than you think!