Will Buying a Home in Foreclosure Reduce Neighborhood Home Values?

Buying a home in foreclosure

One of the best ways to find a home selling for well under its market price is to try to buy a home that’s in foreclosure. While buying a home in foreclosure may be able to get you a fantastic deal, it can also come with some serious risks and considerations. One of the most important things to consider is how homes in foreclosure may reduce neighborhood home values.

How a Foreclosed Home Purchase Affects Nearby Home Prices

A neighborhood with many foreclosed homes for sale will typically see home prices drop. This is usually due to several factors; primarily, home buyers in the area will try to buy the foreclosed homes first (in the attempt to get a better price), before trying to buy traditionally sold homes. This will bring down overall asking prices in the area. In addition, many foreclosed homes are in bad condition, which reduces the curb appeal and livability of the neighborhood as a whole. 

Will the fact that you’re buying a home make prices drop further? No -- actually, the fact that you’re buying the home will mean that there are now less foreclosed homes in the neighborhood, and should have a positive effect on home values there.

However, the main thing you should look for is if there are many other foreclosed homes in the nearby area. If there are, you may want to steer clear of the neighborhood. But, if the home you’re interested in is the only (or one of very few) foreclosed homes in the area, it might be the steal you’re looking for.

Other Risks of Buying a Foreclosed Home

In addition to the fact that buying a foreclosure could be risky if you’re purchasing in a neighborhood that has a lot of other foreclosures, there are other risks, too. In particular, since you may not have time to personally visit a foreclosed property before buying it (especially if the property is bought at auction), it could be in seriously bad condition and may need thousands of dollars of maintenance. The cost of all that maintenance could completely zap the savings you got from buying a foreclosure in the first place. 

In addition to potentially being in poor condition, a foreclosed home could have one or more liens (obligations for unpaid debt) against it. If you purchase it, you could easily become responsible for paying them off. Much like the cost of physical repairs, paying off liens could eat up any savings you got from purchasing the home at a discount.

 Buying a Foreclosed Home vs. an REO Home

If purchasing a foreclosed home seems too risky and too time-consuming for your taste, you may want to consider buying an REO (real estate owned) home. REO homes have already gone through the foreclosure process and are typically owned by the bank that held the previous owner’s mortgage. Unlike foreclosures, REO homes have already had any (known) outstanding liens against them paid off and will have been previously inspected, so you’ll likely have a better idea how much you’d have to pay in repairs if you decide to buy the home. 

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