Buying a house in foreclosure: the pros and cons

A new home at a bargain price and with incredible investment potential. Too good to be true?

Is it wise to be buying a house in foreclosure? The word foreclosure is ominous, but if you’re seeking a new home and are disheartened by how expensive properties are, it’s also an opportunity to get a house within or below your budget. However, there are still risks to this decision. 

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What is Foreclosure? 

Foreclosure is when a lender repossesses a homeowner’s property because the homeowner has failed to keep up their payments on the property. 

But as a buyer, how do you buy a house in foreclosure? There are many ways to go about it: 

• Buy at an auction.
• Buy from the homeowner before the home is foreclosed.
• Buy from the government.
• Buy from the bank on the open market through a real estate agent. 

The Cons of Buying a House in Foreclosure

While buying a house in foreclosure might be an attractive prospect, there are some drawbacks that you should take into account.

1: Competition

Foreclosed houses (commonly called repossessed houses in South Africa) are cheap, which is why property investors on the hunt to buy and then flip them will be ready to pounce once one becomes available. 

If you’re at an auction to buy a repossessed house, be prepared for a bidding war. 

• To avoid setbacks, make sure you have the deposit ready and a pre-approved mortgage so you can jump in with an offer. If you’re buying the house at a short sale, build rapport with the homeowners to give yourself a better chance.

(A short sale is when the homeowner sells their home for less than what they owe on their mortgage in an attempt to pay off what they owe to the lender before the lender forecloses on the house). 

2: Maintenance

If a house is foreclosed, it is unfortunately sold in its current state. The homeowner won’t have money to remodel or even maintain it when they cannot afford to pay their mortgage. This could mean the house has serious problems that run deeper than peeling paint or scuffed flooring. 

• Make sure you have the budget for home repairs and renovation when buying a house in foreclosure. It would help if you accounted for maintenance costs. 

It’s also helpful to enlist the services of a real estate agent, as they might be able to negotiate a better price for you if the house is in a terrible state.

3: Squatters

Buying a house in foreclosure doesn’t guarantee the house will be empty. If the home is vacant for a while, squatters will likely move into the property. 

• Evicting squatters is a costly and challenging process. You’ll need to get a court order against them, and overall the eviction process could take years while draining your money. 

For example, in 2019, a property owner in KwaZulu Natal spent over R300 000 in legal fees to evict unlawful squatters from his property. 

The Pros of Buying a House in Foreclosure

According to South Africa’s National Consumer Regulator, almost 2000 homes are repossessed every month by the bank and auctioned off without a fair market value assessment. This gives buyers an excellent opportunity to purchase a home at a bargain price. And that’s just one benefit to buying a repossessed house. 

1: Price

When you’re buying a house in foreclosure, the price of the home is generally much lower than its market value. This is true whether you bid for the house at an auction, buy the home from the bank through a real estate agent, or buy the home at short-sale. 

• But why are repossessed houses cheaper? Because the house is in a state of disrepair and needs maintenance, and the lender wants the property off their hands as soon as possible. The lender isn’t interested in making a profit; they need to cover the cost of the homeowner’s outstanding payments. 

2: Investment

Don’t let the current state of a repossessed house fool you when you’re buying a house in foreclosure. Imagine its potential, what it could be. Then take advantage of the low price, buy it, and make a profit in the future. 

• If the foreclosed house is in an optimal location and you have the budget for extensive repairs, then you could give the house an upgrade and either flip it for a higher price or rent it out for passive income. 

3: No Transfer Duty

When buying a house in foreclosure, you are not required to pay a transfer duty fee. 

Transfer duty is a tax that buyers must pay to SARS when taking ownership of a property. The amount will depend on the property value, but you can calculate your transfer duty fee with SARS. 

Find a Foreclosed House With Seeff

Ready to spring for a bargain and buy a house in foreclosure? Browse Seeff’s list of available distressed homes.