“Get rich investing in real estate!” “Buy homes for pennies on the dollar!” These are the kinds of statements people often associate with real estate foreclosures. In reality, property foreclosures seldom lead to get-rich-quick success. Great deals are out there, for sure. However, it takes a lot of work and due diligence to reap those potential rewards. This guide examines the advantages and disadvantages of buying a foreclosed home. It also explains the process step-by-step. The process is the same, regardless of whether you plan to live in the home yourself or rent it out. Buyers fitting both profiles can benefit from sourcing homes on the foreclosure market. Here’s what you need to know.
Background Primer: What Is a Foreclosure?
Homeowners seldom buy properties outright. In the vast majority of cases, they get a mortgage from a bank or alternate lender to finance the purchase. The buyer then becomes responsible for making scheduled payments to the lender.
In some cases, borrowers default on these payments. According to the University of Illinois, common reasons include:
- Financial stress rooted in divorce.
- Major medical expenses, especially resulting from the unexpected illness of an uninsured or underinsured homeowner.
- Job or income loss.
- The death of the household’s primary income-earner.
All mortgage contracts include legal mechanisms known as liens. A lien secures the lender’s financial interest in the home. It allows the institution to acquire ownership of the property should the borrower fail to meet their payment obligations.
In most cases, banks work with distressed homeowners to try to find a solution to the problem they are facing. If those efforts fail, the bank will foreclose on the home, using the lien from the mortgage contract to take control of the property.
From there, the bank will then sell the home itself or put it up for auction. In some cases, the current owner will complete what is known as a short sale. This process allows a buyer to acquire the home at its market value, even if that amount is not enough to clear the outstanding mortgage debt.