Are Foreclosed Homes Cheaper Than Other Homes?

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Foreclosures are a common type of sale found in any healthy real estate market.

Foreclosed homes are also known as “bank owned properties” “REOs” (Real Estate Owned, a term on a bank balance sheet) or just foreclosures.

These homes have been repossessed by the bank that services the mortgage for non-payment of the loan. The servicer (bank or other institution) then sells the property on the open market.

Properties that have been taken back by the bank are very popular amongst investors. It is commonly believed that foreclosed homes are cheaper than properties.

On average, foreclosed homes do sell for less than other types of sales.

However, that does not mean you should not do due diligence on researching the price of the home considering the condition, updates and comps.

Here are some reasons why foreclosed homes tend to sell for cheaper.

Condition

A foreclosed home is a home that an owner has lived in for some period of time without paying the mortgage. Eventually, this borrower finds themself in default.

During that time, it is very common for owners to neglect maintenance on the home. The best case scenario is usually that there are a few repairs needed.

However, I have seen foreclosures that have extensive damage from neglect. This has included water damage from roof leaks and plumbing leaks.

So although the price may be cheaper on a foreclosed home, you also should be asking if it is cheap enough to cover repairs and updates.

Will your purchase price allow for the cost to repair the home and update it, vs. the other comparable sales nearby?

Motivation

Just like any seller, banks vary in how badly they need to sell the homes that they are holding on to.

Sometimes, they are fine holding onto the assets for various reasons. Other times, the banks may need cash so will give a good price.

I have seen foreclosures priced the same as other homes in the neighborhood, and others at a great deal.

In a foreclosed home, the seller (bank or servicer) are much less emotional than a homeowner so they are going to try to maximize profit and not to sell cheaper than they have to.

But banks are not in the business of holding onto properties long term. So if they have to sell, they will make sure to price accordingly.

Initial Pricing

Many big institutions are experts in underwriting and servicing loans, not pricing real estate.

That is big reason why appraisers exist, to give a third party opinion on price to lenders and banks.

Foreclosures also rely on real estate professionals to give them guidance on the market and pricing.

A BPO (broker price opinion) by an real estate agent or an appraisal gives the bank guidance on a suggested list price.

Sometimes, the initial price could be too high for the current market and condition. Or, the bank will list it for a higher price initially.

Foreclosed Homes For Sale & Coming Up

Foreclosure.com is a great tool for looking for these types of properties. With an account, it also gives you access to pre-foreclosures, auctions and other properties.

The properties below are provided by foreclosure.com, and will take you to their site.

Conclusion

Buying a foreclosed home can be a great deal cheaper than other property types and is a great way to expand your real estate investment portfolio.

Why are foreclosed homes cheaper? Generally it is condition of the home, motivation of the lender to not hold onto the home and possibly market conditions.

However, you always want to make sure that the price is right. Considering the work that is needed, the other comparable sales and market condition should be a part of due diligence.