What you need to know if you're considering buying a foreclosure

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• Foreclosed properties are often sold at a significant discount, but they're sold as-is.
• You can find foreclosed properties for sale on online listing sites or in your local newspaper.
• Foreclosures may need extensive repairs or have costly title issues that the buyer will need to deal with.

Home prices have skyrocketed over the past couple of years, leaving many hopeful homebuyers looking for alternative ways to get into a house without having to pay a premium.

Many home shoppers look at foreclosures as a great way to save money on a house, but buying a foreclosure isn't always as cheap as it's cracked up to be.

Though distressed properties often do come at significant discounts, there are costly secrets that can be hiding behind the walls of these homes — things like back taxes, foundation issues, and other problems that can be expensive to fix.

In spite of the risks, many who purchase foreclosures are able to find perfectly habitable homes for less than what they'd have spent on the regular market. If you're thinking about buying a foreclosed home, here's everything you'll need to know.

Types of foreclosed properties

There are a few different types of foreclosures, and multiple ways you can buy one. Here's a quick rundown of some of the basic terms you should know:

• Pre-foreclosure: When a home is in pre-foreclosure, it means that the lender has started the foreclosure process, but the borrower still owns the home. The owner is likely selling because they can no longer afford their mortgage and are trying to avoid a foreclosure.
• Short sale: A short sale is a type of home sale where the sales price is less than what is owed on the mortgage. These homes may or may not be in pre-foreclosure. With a short sale, you'll be buying the home from the owner, but the lender will need to agree to the amount.
• Foreclosure auction: Once a lender forecloses on a home, the home is put up for sale at an auction. This can be a risky way to purchase a foreclosed property, particularly for beginners, because you likely won't have the opportunity to inspect the property before you buy it, and you'll be stuck with any title issues (such as unpaid taxes) that are attached to the house.
• REO: Foreclosed properties that aren't sold at auction are known as real estate owned, or REO, because they're owned by the lender or another entity, such as the US Department of Housing and Urban Development or one of the government-sponsored enterprises that backs conventional mortgages.

How to find foreclosed properties

Often, you can browse foreclosed properties in your area using the same methods you would to buy a regular home, such as online listing sites like Zillow. You can also look at homes that are in pre-foreclosure or are being sold as a short sale.

Foreclosed properties owned by the government-sponsored enterprises Fannie Mae and Freddie Mac can also be found online. Some of these homes may have had certain repairs completed in order to make them eligible for financing.

Fannie Mae's program for Fannie-owned foreclosed properties is called HomePath, while Freddie Mac's is called HomeSteps.

To view for-sale foreclosures owned by HUD, you can visit the HUD Home Store.

You can also check your local newspaper for notices of foreclosure auctions.

Work with an experienced real estate agent

Buying a foreclosure is often similar to buying a regular home. But it comes with significant risks, and the laws surrounding foreclosure vary from state to state, which means that those who are interested in buying a foreclosed property should work with professionals who know what they're doing.

"It's a good idea to work with a lender and a real estate agent who have experience with foreclosed homes to help you navigate the mortgage process and identify the financing options that are available to you," says Mike Qiu, owner of Good As Sold Home Buyers in Seattle.

Get a home inspection (if you can)

When you buy a foreclosed home, you're getting it "as-is," meaning you won't be able to go to the seller and negotiate repairs for any defects you find. This means that getting a home inspection is vital, because it will give you an idea of the amount of work the house needs, and how much money you can expect to spend fixing it up.

Not all foreclosures have significant issues, but if the property has been abandoned or wasn't properly maintained, some of its major components could need fixing up. If it has more significant issues, like damage to the foundation, you'll need to consider whether the money you'll spend repairing the home is worth what you'll save by buying a discounted property.

"The main challenge is the condition in which you may find the property, including hidden problems like foundation issues, deferred maintenance, inoperable systems, among others," says Kofi Nartey, founder and CEO of real estate firm GLOBL RED. "My recent buyer of a foreclosure had thousands of dollars of deferred maintenance to deal with, as well as general updating and repairs"

The problem with buying a foreclosure is you might not get the chance to order a home inspection. If you're buying the home at auction, you won't be able to get the home inspected. This is extremely risky, since you'll have no idea what condition the property might be in.

When buying an REO property, you may get a chance to have an inspector look at the home. You won't be able to negotiate repairs, but as long as you have an inspection contingency in your contract, you can walk away if you decide issues uncovered by the inspection are more than you can handle.

Financing options for foreclosed homes

Depending on the condition of the property, you may have access to the same types of financing you'd have with a regular home purchase, including conventional, FHA, VA, or USDA mortgages.

If the home needs repairs, a renovation loan might be a good option. With this type of mortgage, you can combine your anticipated renovation costs with the sales price into a single loan.

Conventional renovation loan options include Fannie Mae's HomeStyle Renovation mortgage and Freddie Mac's CHOICERenovation mortgage. For FHA borrowers, FHA 203(k) loans can fund both minor fixes as well as major structural repairs.

Whatever type of financing you use, be sure to get preapproved before you start making offers or bids, so you know how much you can afford and can show sellers that you're making a solid offer.

Risks of buying a foreclosed home

"Buying a foreclosed home can be a good opportunity to get a property at a discounted price, but it can also come with risks and challenges," Qiu says. "It's important to do your research and understand the property's history, condition, and any legal issues that may be attached to it."

It's possible to find a foreclosure that has no major issues and is close to move-in ready. But because these properties have the potential to be incredibly costly, it's important to understand what you could be taking on and do what you can to reduce your risk.

The property may have problems, including hidden ones

Foreclosed properties often need at least a little TLC to get them back into shape, and some need significant repairs. Because many house components can cost upwards of $10,000 to repair or replace, foreclosed home buyers should do their due diligence to ensure that the property is in decent condition.

But uncovering issues can be difficult if you're purchasing the home at an auction, where you won't get a chance to inspect the home before you buy it. Driving by the home and taking a look at the exterior can give you an idea of its condition, but the interior could be hiding costly problems.

You'll be competing with professionals to get the house

When it comes to buying foreclosed properties, those who are looking to buy a home to live in are likely going to have to compete with professional investors and house flippers.

This can make getting an offer accepted or making a winning bid difficult, and you may need to submit a lot of offers or bids before you're able to successfully purchase a home.

The title could be cloudy

If you plan to buy a foreclosure at auction, be aware that you aren't just buying the house; you're buying all the legal baggage that comes with it, too.

A home's title refers to who has ownership rights to the property. If a property has clouds on the title, it means that there's some sort of claim attached to it. This could include things like unpaid property taxes, a mechanic's lien, or issues with who actually owns the home. 

Title issues can be costly to resolve. For example, if the previous owner had renovations done on the home that they never paid for, the contractor may have put a lien on the property. If you then buy the home, you'd be legally responsible for paying the contractor. 

If you're buying an REO property not at auction, you generally won't need to worry about this, since the lender will clear the title before listing the property.

You could end up having to evict the property's inhabitants

This is another risk that's unique to properties purchased at auction. If you've made a winning bid and are able to successfully purchase a foreclosure at auction, you may need to go through eviction proceedings to remove the previous owners if they refuse to leave voluntarily.

Depending on the laws in your area, you may need to go through the same process if the property has squatters.

Buying a foreclosed home FAQs

How does buying a foreclosure work?

It depends on the type of foreclosure you're buying. If you're buying a bank-owned property, a pre-foreclosure, or short sale, you'll go through a process similar to buying a regular home, where you make an offer by submitting a purchase contract.

If you're buying a foreclosure at auction, you'll need to attend the auction and make a high enough bid to get the home. Depending on the laws in your state, you may need to wait a little while before you officially get the home, since many states offer homeowners a "redemption period," during which they can still reclaim their home even after it's sold at a foreclosure auction.

What makes buying a foreclosed property risky?

Buying a home always comes with some risk, but with regular sales you typically get time to walk through the home yourself and have it inspected to lower the likelihood of buying a property with major issues.

With a foreclosed property, you often don't get that time. Additionally, foreclosures may be left in disrepair. This can happen for a variety of reasons, including if the previous owner couldn't afford to keep up with basic maintenance or if they purposely damaged the home before moving out.

Who should buy a foreclosed home?

While foreclosures are often more affordable than homes on the general market, they come with some serious risks. The biggest purchasers of foreclosed homes are often investors and property flippers because they have both the expertise to know when a property might be a good deal and the infrastructure to handle repairs, title issues, and other things that are required to turn a foreclosure into a habitable home.

If you're considering buying a foreclosure, you need to be prepared to do a lot of research and learn everything you can about the process. You should also have a way to pay for any repairs or renovations you might need to make, or the ability to DIY those things.