Should You Buy a Foreclosed Property?

Buy a foreclosure only if the discount is large enough to cover unknown repairs, title problems, and the time it can take to deal with whoever lives there. At an auction you usually cannot go inside, you pay a cash deposit on the spot, and existing liens may stay with the property. A bank-owned home lets you inspect and use a loan but sells as-is. If tenants live there, the federal Protecting Tenants at Foreclosure Act, made permanent in 2018, generally requires the new owner to honor a bona fide lease and give at least 90 days' notice before ending any tenancy.

How do the three ways to buy a foreclosure compare?

Auction terms are strict. One Wisconsin sheriff's office, for example, requires 10% of the winning bid at the sale in cash, cashier's check, or certified funds, with the balance due within 10 days after the court confirms the sale. Its properties are sold as-is, are not available for viewing, and are subject to all liens and encumbrances, and the winning bidder does not get possession until after the confirmation hearing, usually 3 weeks to 2 months after the sale. Terms differ by county and state, so read the sale notice before you bid.

REO sales give you more time but have priority rules. HUD sells its homes as-is, will not pay for repairs, and strongly urges buyers to get a professional inspection before making an offer. Offers go through a HUD-registered broker. For listings on or after May 30, 2025, HUD homes marketed as "insured" or "insured with escrow" have a 15-day exclusive period for owner-occupants, government entities, and HUD-approved nonprofits; investors can bid if the property remains unsold and enters the extended listing period.

Arrange a professional inspection when access is available. Complete the public-record checks in red flags when buying a rental property.

What title, lien, and redemption risks come with a foreclosure?

Liens. A foreclosure sale does not clear every claim against the property. Unpaid property taxes, unpaid utility charges, and liens recorded ahead of the loan being foreclosed can stay with the property. Before bidding, pay a title company or attorney for a title search, and ask whether a title insurer will insure the title after the sale.

IRS liens. If the IRS had a tax lien on the property and was entitled to notice of a nonjudicial sale, it can redeem (buy back) the property within 120 days after the sale, or within the state's redemption period if that is longer. A title search shows whether a federal tax lien was recorded.

State redemption periods. Some states let the former owner buy the property back after the sale by paying the sale price plus interest and allowed costs. In Minnesota, for example, the redemption period after a foreclosure by advertisement is generally 6 months, and 12 months in specified cases, such as when the amount owed is less than two-thirds of the original loan. Until that period ends, the former owner can redeem, and you receive the redemption payment instead of the house. Hold off on renovations and new leases until redemption rights expire.

Do you have to keep the tenants?

Usually, yes, for a while. The Protecting Tenants at Foreclosure Act first took effect in 2009, lapsed at the end of 2014, and was restored with no expiration date on June 23, 2018. It applies to the immediate successor after a foreclosure, meaning the buyer at the sale or the lender that takes title:

• Tenants with a bona fide lease signed before complete title transfers to the new owner can stay until the lease ends.
• Tenants with no lease, or a month-to-month tenancy, must get at least 90 days' notice to vacate.
• If the buyer will live in the unit as a primary residence, the lease can be ended early, but the tenant still gets 90 days' notice.

A lease is bona fide only if the tenant is not the former owner or the owner's spouse, child, or parent, the lease was an arm's-length deal, and the rent is not far below market (unless a housing subsidy explains it). For this law, the "notice of foreclosure" is the transfer of complete title under state law, which can occur after the auction. The law also adds protections for tenants with Section 8 vouchers.

State and local law can give tenants more. In New Jersey, with limited exceptions, foreclosure alone is not a ground for eviction: the new owner needs "good cause," decided by a court, such as nonpayment of rent, willful damage, or the new owner's personal occupancy, and the protection applies even without a written lease. Cities with just-cause eviction or rent control rules can have similar limits.

If you buy an occupied REO home, get the lender to tell you in writing who lives there, whether any lease survived the foreclosure, and what notices it has given. Buying a currently occupied rental covers reviewing existing leases and tenant records, and ending a month-to-month rental agreement covers the notice rules once the 90 days have run.

How do you remove a former owner who stays?

A former owner who stays after the sale is not a tenant under the federal law, but you still have to go through the courts. Do not change the locks, remove belongings, or shut off utilities; New Jersey, for example, imposes civil and criminal penalties for forcing a tenant out that way, and a court order is the safe route for any occupant.

The process depends on the state. In California, after a trustee's sale, the buyer must first record the trustee's deed (perfect title), then serve a 3-day written notice to quit, and then file an unlawful detainer (eviction) case if the occupant stays. In a court-supervised foreclosure, such as the Wisconsin example above, possession can come through the foreclosure case after the court confirms the sale. Either way, budget for legal fees and several months without rent. Some buyers instead offer the occupant money to move out by a set date (often called "cash for keys"), with the agreement in writing. The steps for eviction proceedings explains the court process.

When does a foreclosure make sense for a rental?

Run the numbers with every cost on top of the purchase price. This bank-owned house example excludes purchase closing costs:

Subtract your purchase closing costs, such as lender charges, appraisal fees, title insurance, and government fees, from the margin before deciding what to bid. Any repair the inspection missed comes out of that margin. Before you commit, confirm you can:

1. Pay the auction deposit and balance in cash, or qualify for a loan on an as-is REO.
2. Get a clean title search and know whether any redemption period applies.
3. Find out who occupies the property and what federal, state, and local rules protect them.
4. Carry the property through repairs and any eviction without rental income.

If any of these is unknown, a standard purchase may cost less once the risk is priced in. For the features that make any property a good rental, see what qualities to look for in a rental property.