Buying a foreclosed home: Where to search, how to buy and what to watch out for
The deals are real, but there are risks involved.
If you’re searching for a house to buy, and you’re looking for a deal, a foreclosure may be an enticing option. Foreclosed properties, which have been taken back by a lender after the homeowners defaulted on their loan, usually sell for significantly less than similar homes on the traditional market.
The lower price tag has a few strings attached, though. Buying any house can be complicated and a foreclosed house especially so, with its own unique set of risks and challenges. Learn more about how to buy a foreclosed home to decide if it’s a good option for you.
What is a foreclosed home?
Foreclosures have been seized by the lender because the homeowner was no longer able to pay the mortgage. Most lenders will begin the foreclosure process when the owner falls three to six months behind but has been longer as of late.
Foreclosures vary by lender, state and the homeowner’s specific situation, the ultimate outcome is largely the same: The lender seizes control of the property and looks to resell the home as quickly as possible to minimize or recoup any losses. To speed up this process, foreclosed homes usually come at a discount and are often sold “as is,” which means that lenders may be reluctant to make repairs.
For a buyer, the primary difference between purchasing a foreclosure and a traditionally listed property is that you’re buying from a lender and not the homeowner. This changes the dynamics of finding a home, making an offer and negotiating a contract.
Before you start looking for hot foreclosure deals, it’s important to understand the process and what you should expect.
One tricky aspect of buying foreclosures is the number of ways you can buy them. These include:
• Short sales: With a short sale, a lender agrees to accept a sale price that’s lower than what’s owed on the loan. When a homeowner owes more on their mortgage than the equity they have in the home, sometimes known as “being underwater,” lenders may agree to this type of sale if they believe they’ll recoup more from short-selling than a full-blown foreclosure. Short sales are listed openly on multiple listings services and are relatively easy to find with your realtor.
• Auctions: If a foreclosure is inevitable, the bank may let the homeowner take their property to auction. Home auctions are typically administered by a county or municipality-level agency. Buyers at auction should be prepared to make a full-cash offer and be ready to stomach some risk; the property’s condition and who holds the title may be uncertain.
• Direct from lender: Properties that have completed the foreclosure process and are released to the lender become bank-owned or real estate-owned homes. Banks tend to take their time with what are called real-estate owned homes in order to find the most profitable offer. As a result, buying an REO (real estate owned) home can take a long time, depending on the number of foreclosures the bank is handling. Sometimes, it can take months for a bank just to respond to your offer.
• From the government: Agencies such as the US Department of Housing and Urban Development, the Department of Agriculture and the Department of Veterans Affairs also sell foreclosures on loans they guaranteed. You can find listings online at the various agency websites but must work with a real estate agent/Realtor to make an offer.
• Pre-foreclosures: Homeowners in the pre-foreclosure stage have received notice from their bank that foreclosure is looming. They will have a specified period to catch up on payments and late fees but will often look for a buyer who will pay the right price for their home to save them the financial trouble of foreclosure. Pre-foreclosures can be harder to find since they’re not officially on the market.
If you’re thinking about buying a foreclosed home, choose your real estate agent/Realtor carefully.
An agent who knows how the process of buying a foreclosed property works will be very helpful. Understanding the process allows the agent to manage buyer expectations. An agent with a lack of foreclosure experience can make the transaction a bit challenging. Marzeotti Group is experienced and can help.
Get Pre-approved: Securing your mortgage preapproval is an essential step for any prospective buyer, but it’s critical when targeting foreclosures. The most successful foreclosure buyers make all-cash offers, which immediately gives them a leg up on anyone who still needs to secure financing. A preapproval letter proves that you can back up your offer and close the deal.
You may also want to investigate alternative loan options that work well for foreclosures. The FHA 203(k) loan, for instance, lets you finance up to $35,000 in repairs or upgrades into the loan, which is particularly helpful since foreclosure properties often need a lot of work.
An experienced agent should have no trouble helping you find foreclosure listings. Good luck and call if you need help!