Skip to main content

The Risks of Buying a Foreclosure

Posted by attorney Mark Campanella

If you’re in the real estate market for either investment property or just a good ol’ fashioned deal on your new home, there’s something to be said for looking to distressed properties for a great bargain. For better or worse, the foreclosure rate is still higher than it should be as our economic recovery remains sluggish at best. With interests rates at still phenomenally low levels and foreclosure inventories remaining high, many individuals might want to seriously consider a distressed property as a viable option. That said, be advised that there are risks, and before you venture too far down that road, you should understand what they are.

As I see it, there are at least three potential issues related to buying a foreclosed piece of property. These are not presented to scare you off the foreclosure track, but are merely offered to inform you as to the possible risks. I tend to find that the best decisions are those that are entered into with eyes wide open, and with the buyer having a full grasp of the situation.

The first issue is one of timing, or, more particularly, lack of available time. Buying a foreclosed property generally means that the sale is fairly quick. While the turnaround for a foreclosed property compared to traditional home purchase makes foreclosures attractive for yet another reason, that quick turnaround poses a risk. Understand that most foreclosures are sold “as-is". Because the transaction happens so fast, many buyers don’t have sufficient time to adequately inspect the property. Things that otherwise might have been discovered during the course of a more traditional due diligence effort can get missed, including water damage or environmental issues. While the discount achieved on a foreclosure might minimize the impact of these oft missed issues, as a buyer you nonetheless should pay close attention as these are issues you will ultimately inherit.

The second issue relates to paying for the purchase. Some foreclosures require cash or cash equivalents. In some instances, a cashier’s check will suffice. The bottom line, however, is that, depending on the purchase price, most individuals don’t have the ability to pony up significant sums of cash on the spot. This reality can dampen many a potential buyer's interest in buying foreclosed property. There is a silver lining, however. Most foreclosures don’t require cash only, but will allow you to finance. You will need to be prequalified before you’re allowed to make a bid, however, and you should be prepared to provide an earnest money down payment. If “all cash" is being demanded, you should probably proceed with caution. When this happens, it often means that the property requires extensive repairs and/or has major structural issues, which is otherwise depriving it of traditional financing options.

The last major issue with purchasing a foreclosure is the threat of litigation. On a positive note, New York is not a right of redemption state after the sale. This means that buyers generally don't need to worry about homeowners trying to redeem their rights and get back into the property after the sale. Although there is always ongoing talk in the legislature about passing a bill that would allow a post sale right of redemption, the measure hasn’t yet passed, and doesn’t seem likely to any time soon. Nonetheless, buyers are still faced with the risk, slight or otherwise, of litigation commenced by another lender, the state or even a federal agency.

At the end of the day, purchasing a foreclosed property can make tremendous sense, especially from a financial and/or investment standpoint. Are there potential issues to be aware of in the process? Definitely. If you’re not comfortable with some measure of risk, buying a foreclosure may not be the right move for you. It’s a personal choice that you need to make. As always, know your rights, and understand your options.

Author of this guide:

Was this guide helpful?