It is no secret that some of the greatest savings a home buyer can make when shopping for a new home are in purchasing a foreclosed home. Foreclosed houses have always been quickly snatched off the market by investors and home buyers looking to save a pretty penny. Sure, the home may not always be purchased in the absolute best condition, but typically foreclosed homes are sold at ridiculously low prices, making it difficult for anyone in the market to buy a home to turn down such a great deal.
Still, for those who aren't serial foreclosure hunters, or at least those who have never purchased a foreclosed property before, it isn’t exactly common knowledge that the process for buying a foreclosed home differs from the standard home purchase process. On top of that, foreclosure is actually a lengthy situation, with different phases. To purchase a home in foreclosure means understanding what to expect and how to go about the purchase depending on what stage of foreclosure the property is in.
Of course, this also means understanding what foreclosure is, as well as what it entails.
What is foreclosure?
For home buyers and homeowners unaware of what foreclosure actually is, we’ve got you covered. Foreclosure is a legal process in which lending institutions seize control of a property whose homeowner has defaulted on the mortgage payments. When a borrower is late on a mortgage payment, it is known as delinquency. If the payment is missed altogether, this is known as defaulting.
As it turns out, defaulting is a major red flag for lending institutions. This can be seen in the fact that when a homeowner defaults on their mortgage payment, it is almost always an automatic trigger for the foreclosure process to begin. Now, what happens at that point is dependent on the lender and the state in which the property is located, but one thing is for sure, foreclosure is not a pretty scenario for any homeowner.
Luckily, foreclosure isn’t something that sneaks up on unsuspecting homeowners. Rather, from even as early as the delinquency stages, lenders typically send out warnings to the homeowner, and often times will extend a grace period for them to make the missing payments with little to no repercussions. Even after the warnings are issued, the home is technically in a state of pre-foreclosure, which still gives the homeowner time to make up the missing payments or enter into a mortgage modification agreement.
When that period of time is up, and the lender has yet to receive payment on the mortgage loan, the foreclosure goes into effect. Depending on the state the property is located in, this entails the property being seized from the homeowner by either the local law enforcement officials or the lending institution itself, and sold at whatever cost it takes for the lender to make back what is still owed on the principal balance of the mortgage.
Make no mistake, foreclosure is a terrible, heartbreaking event that has cost many borrowers and their families not only their homes but their sense of security as well. It is a harsh reality that should be avoided at all costs, and something to keep in mind as a potential buyer of a foreclosed home.
How Buying a Foreclosed Home is Different from a Traditional Home Purchase
Now that we’ve laid out how foreclosure works, it is a bit easier to understand how buying a home in foreclosure is a different process than the typical home purchase. After all, it’s not like homes in different states of foreclosure are listed in the same way as regular homes for sale. No, buying a foreclosed home requires a specific process that calls for expert timing, industry know-how, and a ton of patience. Beyond that, Some major differences between buying a foreclosed property and a regular property include:
Usually, one agent who specializes in the purchase of foreclosed properties is involved in the process.
There may not be any room for negotiation since the lender has a set amount that they absolutely intend on getting for the property. The sale price is almost always final.
Sellers may require a pre-approval letter from a lender depending on what stage of foreclosure the property is in since ultimately they would be inviting a new borrower into the mix.
Homes are sold as-is (and may not be in great condition). This doesn’t mean that a foreclosed home is always in some state of disrepair, but there are plenty that are, and the foreclosure purchase process doesn’t leave much room for a home inspection, so as a buyer, it pays to be vigilant about the state of the property being purchased.
How to Prepare to Buy a Foreclosure
If you have your heart set on buying a foreclosure, the first thing you should do is to find a real estate broker that specializes in foreclosures. Ideally, this is one who has good relationships with banks who may own foreclosed properties. Meanwhile, you should also contact lenders in an attempt to get a pre-approval letter.
While it’s a good idea to contact brokers directly, you may find more success by directly researching foreclosure listings, which can be found on certain sections of traditional real estate websites, as well as on websites that specialize specifically in foreclosures. Some of these homes may be listed as REO (real estate owned), which means that the property is currently owned by the bank or lender.
Since foreclosures often go quickly and competition can be fierce for properties set at a low price, it’s pretty much always a good idea to have a pre-approval letter before you start seriously pursuing foreclosed properties. Since you’ll likely be up against serious buyers who already have a pre-approval letter (or may even have the funds to buy the house in cash), you’ll need to show you’re serious, too, if you want to have a good chance at buying the home you want.
Buying a Home in Pre-Foreclosure
During the early stages of foreclosure, or rather, during the pre-foreclosure stage, one of the options a homeowner has is to cut their losses and sell their home. This type of home sale is known as a short sale. The term “short sale” is said to come from the sale price “falling short” on what is actually owed on the mortgage. This is important to remember since it is for that exact reason that home buyers and investors love purchasing short sale homes.
These are easily some of the best prices one can find for a home, but there is a catch. Finding a short sale is a particularly daunting task. Most of the time, it involves directly confronting the seller even before the home is listed for sale! This may seem like a rare scenario, but with the right agent, it's not exactly impossible. In addition, there are a few sites that list homes in the pre-foreclosure state.
If you’ve found one that interests you, it is always recommended that you survey the property, to make sure you are okay with the condition that it is in. Driving by is great for a first impression, but don’t hesitate to stop and lawfully inquire about the home from the owner or even a knowledgeable neighbor.
If all is well and your interest in the property hasn’t waned, then the next step is to assess the value of the home and the costs associated with purchasing it. This is important information to know before approaching the seller with your offer. The values and costs can be determined through public record and a discussion with the lender servicing the loan.
When you are sure of the values and costs, the time has come to approach the seller, and make your offer. Remember, purchasing a home in foreclosure often times requires payment upfront. For a short sale, this is even more imperative, as the homeowner needs the cash in order to settle their debt and save themselves from further financial hardship. This is one of the only opportunities a buyer would have to negotiate, but remember, there is a bottom line that both the lender and the seller will not drop below, and you still have to try to make it worthwhile in order for the seller to agree to your offer.
If an agreement is reached, the deal is almost done. All that is left to do is have a professional draft up a purchase agreement to be read and signed by both parties. It is extremely important that the purchase agreement includes a clause that the finalization of the deal takes place after a professional home inspection and title search is completed. After that, all that is left to do is arrange for an escrow company to oversee the transfer of property and funds between the parties involved. After this short sale closing procedure, the property is a good as yours.
Buying a Home in Foreclosure
Once the pre-foreclosure stage passes and the property has not been paid for or purchased through a short sale, the actual foreclosure process takes effect. In this stage, the home is seized by either law enforcement or the lender and put up for auction. These foreclosure auctions are much easier to find than the short sale but can be highly competitive between prospective buyers.
Add to that the fast-paced nature of these auctions. In most cases, properties are to be paid for in cash at the time of purchase at the auction, which virtually eliminates the chance of inspecting the home or looking up the title. It is common for buyers to have to assume all risk for the properties purchased in this manner. In a way, it's not too different from high stakes gambling.
If you’ve found an auction that you wish to attend, it pays to research what you might need to bring. Many foreclosure auctions require some sort of proof of intent for the buyers attending. This could mean a check of a specific amount made out to the auction house, or even a percentage of the winning bid amount in certified funding in order to participate. Remember that even though this may sound excessive, many auctions require same day payment for a successful bid.
The good thing about foreclosure auctions is that they are advertised ahead of time, and there are sources you can use to get information about the foreclosed homes being sold. For a foreclosure auction, there is no greater advice than to do your homework. Find the properties of interest ahead of the auction date. Narrow down your list of properties you would like to bid on, and then go check them out for yourself if you are able to do so.
Of course, you must know how much you are willing to bid on the property. It seems like an obvious thing to remember, but the devil is in the details. Remember that a lot of foreclosed homes need plenty of repairs or renovations before they are livable. This holds true no matter what the home is to be used for, whether you intend to live in it, rent it out, or flip it and resell it for a profit. Always remember that the sale price is not the only cost to consider at these auctions. That said, have an idea of your absolute top bid amount, saving some funds for any work that must be done after the fact.
With all of this in mind, all that's left to do is attend the auction and hopefully place a successful bid on a property that you’re interested in owning! To make this more of a reality, it helps to show up early and get settled. Auctions can be super fast paced, so you’ll want to mentally prepare for the chaos beforehand.
Buying a Real Estate Owned Home
Finally, not all homes get purchased through the auction phase. These homes are then deemed “real estate owned” (REO) or bank-owned properties. REO properties, unlike with foreclosure auctions, are not sold at a high-speed pace. Buyers of these homes are at the mercy of the lender that owns them, and the entire process can seriously drag on longer than you can imagine.
To make things worse, these sales almost always require an expert on your side who can help you navigate the proceedings with caution. REO sales are, after all, notoriously tricky transactions. These homes are often sold as-is, and most have not been occupied for extended periods of time.
REO properties can be found through the usual channels such as MLS for example. That said, of the three methods of buying a foreclosed property, this is the method with the lowest chance for getting a bargain. REO Properties are sold with the lender’s full intention of making their money back.
Getting pre-qualified or pre-approved beforehand greatly speeds up the entire process. Also, when you find a property, due diligence is your responsibility. This means doing a title search and getting a home inspection and appraisal. You have to be armed with everything you can find to make sure there are no setbacks to the proceedings.
Making an offer on an REO property isn’t something that you can expect a response to immediately. As a matter of fact, you offer is almost certain to pass through many hands before you ever even get word that it has been received. Furthermore, at this phase of the foreclosure process, the decision has to be okay-ed by the higher-ups of the lending institution, to make sure that they get the best price for the property.
Which is why you shouldn’t be surprised if you receive a counter-offer as a response. You can try your best to negotiate, but if they are firm on the price, you may have to try negotiating for a lower interest rate or reduced closing costs.
Finally, once a decision is reached, all that's left is financing the home purchase. The bank may be willing to finance the deal themselves, but it's not unheard of to have to seek financing from a third party source. When the deal goes through, the home is all yours.
Buying a Foreclosed Home: In Review
It's not easy to pass up the extreme savings of purchasing a home in foreclosure. That's why so many investors and savvy home buyers keep an eye out for them. Even so, buying foreclosures can be a daunting and time-consuming affair, it’s definitely not for the weak-willed.
For those who decide to dive in and give it a try, there are some things worth remembering. For starters, having your finances set up beforehand is a huge help. Especially if a short sale is your ideal target.
If you decide to go the auction route, remember to do your homework ahead of time. Know what properties are worth your bid. Equally as important, know what your maximum bid should be. Remember that funds may still be required for repairs and renovations after the purchase is made.
Lastly, if you’re trying to snag a Real Estate Owned property, have patience. Buying in this situation will never be a fast-paced scenario, so be ready to play the long game. And don't’ forget to at least try negotiating with the lender.
Most importantly, if you ever find that you need expert advice on purchasing a foreclosed property, always remember that you can call the specialists at home.loans for a risk-free consultation.