How to Buy Homes that are Foreclosed

house that is foreclosed

Image by Nathan Anderson on Unsplash

A foreclosure is when the previous owners fail to make their mortgage payments and the lender takes back the property, then resells it. Buying a home that is foreclosed is often an appealing idea to homebuyers, mostly because of its typically lower purchase price. Yet doing so also often comes with a level of risk.

Buying a Foreclosed Home: How Does It Work?

There are key steps to know in buying homes that are foreclosed. Understanding the order each step occurs in the foreclosure buying process is important for successfully making the purchase.

  • Get pre-approved for a mortgage. Know how much you can afford for a mortgage if you don’t have the cash on hand to make the purchase without one. Keep in mind that a bank may not lend to someone buying a foreclosed home because of the risks involved. Also, cash in hand is often required when the foreclosed property is being bought at auction.
  • Work with a real estate agent that is experienced with foreclosures. Experienced agents like those at Berkshire Hathaway HomeServices Select Properties can help find homes that are foreclosed that also meet your list of needs. Because they are experienced, they can also work you through the entire process smoothly and thoroughly. Trying to negotiate a sale on a foreclosed property on your own to reduce closing costs can result in bigger headaches all along the way.
  • Submit your offer. (Or if at auction, place your bid.) Keep the price you offer away from the top end of your budget. When buying a foreclosed home, the buyer will also need money for inspections, closing costs, insurance, property taxes, needed repairs, and renovations.
  • Arrange for a home inspection once the offer is accepted. When buying a foreclosed home, the inspection happens after the fact. Therefore, the condition of the property cannot be used as a price negotiating tool in this scenario. The inspection instead tells the buyer more about what will need to be repaired or renovated.
  • Repair or renovate until it is move-in ready. Or if buying the foreclosed home with the idea of flipping for resale, or renting, then prepare the property to do so.

Knowing the different stages of foreclosure can also help a buyer work through the overall process better.

In pre-foreclosure, the current homeowner tries to sell once they realize they can no longer make the mortgage payments. They are looking to sell and pay off the mortgage. Like a pre-foreclosure, a short sale is also when the current homeowner tries to sell the home but has the bank’s permission to accept less than they currently owe on the mortgage.

Buying a home at auction can be a faster way to buy a foreclosed home, but the buyer will usually need to pay in cash. An REO (real estate owned) home is actually owned by the bank, not an agent or company as is often thought. Sometimes, the property remains unsold after auction. The lending bank will then sell an REO property through a real estate agency to recoup the bank’s losses at least to some degree.

Benefits to Buying a Foreclosed Home

Buying a foreclosed home is popular with property investors, including real estate agents and “flippers.” The property can be purchased at a bargain, renovated to make it both livable and marketable, then sold again at a profit for the investor. But this also forces competition for buying foreclosed homes between property investors and individuals who are simply hoping to buy a home to live in themselves.

Knowing how and when to buy homes that are foreclosed can be an important skill for any property investor or would-be home-owner. After all, the main appeal comes from the reduced asking price listed by the seller. Typically, this price is 5 percent lower than the price would be on the regular market. But why?

A bank that has already taken possession of the foreclosed home will be eager to sell it as quickly as it can. The longer the house stays in the bank’s inventory, the more money they could lose on it. Not only are they missing out on payments, but the bank might also have to pay for maintenance and property taxes on it while in their possession.

The bank will also have to carry insurance coverage on the foreclosed home until it is sold. For these reasons, they will be eager to get the foreclosed home off their books, even if they have to offer it at a significant discount to attract buyers.

Another reason for the lower selling price when buying a foreclosed house is because it is almost always sold “as-is.” This means that the potential buyer makes their offer knowing that they will be responsible for any work that the property needs to be livable.

Buying a foreclosed property may be a buyer’s best chance for homeownership. Or they may see it as the most viable option for living in their preferred location or neighborhood.

Still, other individual homebuyers look at buying a foreclosed home as a fixer-upper, and a way to turn it into a home that is uniquely theirs. As a fixer-upper, a potential buyer will need to consider the time, money, flexibility, and patience it takes to repair and renovate a property.

home buyers trying to buy a foreclosed home

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Risks to Buying a Foreclosed Home

With any benefit typically comes some level of risk. Buying a foreclosed home is no exception. What seems like an incredible deal can also come with significant drawbacks. A homebuyer needs to know exactly what they are getting into. This is also where working with a real estate agent that has foreclosure experience becomes both vital and invaluable.

Neglected properties can come with a high price for repairs. Often, because the owner no longer has the means to make the house payment, they also lack the means to maintain the property. The resulting neglect can range from carpet stains and unkept yards to broken windows and a leaking roof. Once the foreclosure process has begun, the owner might even simply abandon the property.

In any case, the buyer of the foreclosed home will be responsible for fixing whatever needs to be fixed. Remember, foreclosure homes are typically sold as-is.

Location could be another issue with a foreclosure, making it a bad investment no matter what its asking price is.

If the foreclosed home is located in a region of the country that has come into hard times, it may not be the ideal setting for purchasing. For example, if a major employer in the region closes its facilities and moves away, its workers will often move with it and leave their mortgaged properties behind.

Banks have a hard time selling foreclosed properties in economically depressed communities, and property investors may equally have a hard time if they are planning to resell.

On the flip side of this, the competition for buying a foreclosed home can also be fierce in the market. If real estate investors are looking at the same foreclosures as individual homebuyers, the bank that is holding the mortgage and property title will sell the home simply to the highest bidder. A personal appeal of any kind, under a foreclosure scenario, will not sway a bank’s decision as they are acting solely with interest in their financial bottom line.

The Key to Foreclosed Home Buying Success

Finding a foreclosure can be a great way to become a homeowner. It can get a buyer into the home and neighborhood they wish for, and at a much lower price. The buyer can often get “more house for their money,” but they will need to understand the pros and cons of buying a foreclosed home before they start the process of doing so. 

Buying a foreclosed home is not the same as buying any other house on the open market. And states vary in their home foreclosure process. 

In Missouri, for example, a lot depends on at what stage the foreclosure process is in, and there are laws that a bank must comply with to foreclose on a  home. Borrowers in Missouri who are in danger of foreclosure are entitled to the following:

  • Written notice that the loan is in default 
  • Foreclosure can not begin until payments are 120 days past due
  • The bank must notify borrowers 20 days prior to a sale and post notice in local news sources 20 times
  • Borrowers can redeem the property if they pay the full amount of the loan within one year of foreclosure—provided they give notice of their intent to do so at the time of foreclosure, and that the property has not been sold to a third party

Working with real estate agents who are experienced in foreclosures like those at Berkshire Hathaway HomeServices Select Properties is a great way to ensure a buyer’s success.

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