Pros and Cons of Buying a Foreclosed Home

Five years ago, a home buyer could spot a bank foreclosed home a mile away. They were abandoned structures, stripped of all appliances and fixtures, with unkempt landscaping and falling down “For Sale” signs.

Today, banks often renovate their REOs (also known as bank real estate owned) before listing in hopes of selling to end users, not contractors or investors who will capitalize off the bank’s loss.

Banks know the market has improved, and they aren’t as desperate as they used to be. They want to minimize their loss on each sale — not simply sell as quickly as possible. This creates some potential risks and rewards for home buyers considering purchasing a foreclosed home.

To help you make a smart decision, here are some pros and cons for buying a foreclosed home in today’s market.

PRO: They are still cheaper

Today, bank foreclosed homes are typically about five percent below a comparable house in the same location that is not a foreclosure. In previous markets, they were often in horrible condition and about 15 to 20 percent below market.

While many new buyers set out in search of the deal that comes with these sales, many REOs should be left to more experienced home buyers.

CON: Foreclosed homes can be very risky

Even though they are priced higher today, REOs still come with baggage. Many banks will invest money to make the listings look nice and get the prices up. In return, they are less flexible on price and less eager to sell in general.

Behind the scenes, these are still risky sales. You don’t know about the history, and there are no disclosures about leaky roofs, mold or crime. And you are forced to buy the home “as is,” without any recourse if things go wrong.

Investors were once fine with this risk, but they are less interested today because the “deals” are gone.

CON: Many foreclosed homes are not in prime locations

Many of today’s foreclosed homes are in less desirable parts of towns or school districts. If you see an REO and the price looks good, remember that it may not be the foreclosure that makes it such a great bargain. It could be location, and you don’t want to get stuck unloading a home in a bad location in a few years. Foreclosed homes in good locations will sell quickly.

CON: Banks aren’t people

Consider that you are negotiating with a spreadsheet. Unlike a typical seller who may care about your situation, your personal background or market history, banks don’t. Your offer is likely submitted electronically and placed into a cell on a spreadsheet for an asset manager to consider. If the numbers don’t work, expect a big rejection. Never get your hopes up.

Buyers today can’t assume that a bank-foreclosed home is a good deal. While you can still find a needle in the haystack, they are fewer and farther between.

Banks want top dollar out of their foreclosure inventory. They are sellers just like anyone else. They watch the market and read the headlines. Foreclosed homes will be priced slightly lower than the market, but they are still as-is, take it or leave it with some risk associated. Do your homework and work with a good local real estate agent before signing on the dotted line.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Brendon DeSimone is the author of "Next Generation Real Estate: New Rules for Smarter Home Buying & Faster Selling," the go-to insider’s guide for navigating and better understanding the complex and ever-evolving world of buying and selling a home. DeSimone is the founder and principal of DeSimone & Co, an independent NYC real estate brokerage providing individualized services and a fresh, hands-on approach. Bringing more than a decade of residential real estate experience, DeSimone is a recognized national real estate expert and has appeared on top media outlets including CNBC, Good Morning America, FOX Business, HGTV, FOX News and Bloomberg. Consumers often call on Brendon for advice and to help them find a real estate agent. You can follow him on Twitter.