What You Need to Know About Buying a Foreclosed Home
Buying a foreclosed home used to be a difficult situation during the 2001-2009 mortgage crisis. Those involved in real estate needed to sift meticulously through legal findings or follow auctions that courthouses put on. As the number of available foreclosed properties grew, it became significantly easier to find them. Today, it’s completely possible to find foreclosed homes in nearly any real estate market and both homeowners and investors have an opportunity to capitalize on purchasing a foreclosed home.
So, what do you need to buy foreclosure homes? Our experts at 33 Realty will break down the process for you.
What Is a Foreclosure?
First, you may be wondering about the simple definition of a foreclosure and how it works. They occur when a lender obtains a property from an owner. These situations occur when the owner has defaulted on their mortgage or fallen behind on payments. In return, lenders work to recoup as much as the investment as possible by selling the property for a slightly lower value than it may be worth.
Buyers are excited about foreclosures because it gives them a home for below the real market value. The bank is often very motivated to sell the house as soon as possible and they are usually willing to negotiate.
How to Find Foreclosures
If you’re on the hunt to find foreclosed properties, you can head to a multiple-listing service (MLS) online, search local newspapers, and call bank offices. If you search in local multiple-listing services, know that the foreclosed status of properties may not necessarily be emphasized so be sure to carefully read the property description.
If you’d prefer to take a more direct route in finding local foreclosures, you can use websites that specialize in finding foreclosed homes. Financial institutions may also have online pages that are dedicated to showcasing foreclosed homes.
As lenders are increasingly selling seized assets via other real estate agents, you can also reach out to a local real estate broker like ours for additional opportunities.
Types of Foreclosure and Approaches to Buying
There are various stages of foreclosure that impact where the home is in the process. In the early stages such as pre-foreclosure, the original homeowner can still choose to show the property. In later stages, the bank or the government may complete the showings.
Here are the different stages of foreclosure.
When a property is in pre-foreclosure, it means that the lender has contacted the borrowers and alerted them that they are in default, but the property is not yet offered for sale at an auction. Homeowners can still choose to sell the property during this time to avoid the foreclosure proceedings. Selling it early also avoids negative impacts on the owner’s credit history and future buying endeavors.
Homes in the pre-foreclosure stage are usually listed in county and city courthouse buildings. Take advantage of the many online resources that list homes in the pre-foreclosure phase. The foreclosure proceeding then moves to short sales.
The next stage of foreclosure is short sales which occur when the lender accepts less for the property than what they owe on the mortgage. In this case, borrowers do not need to be in default, but they must prove that they are experiencing financial hardship (such as losing a job).
In short sales, the residence is underwater, meaning it’s worth less than what is owed. Qualifying as a short sale means that the lender agrees to “sell the property short” as they accept less than the owed amount and officially list the property for sale. Short sales are often advertised as “pending bank approval.”
Short sale property purchases are regarded as the same as a traditional home purchase, however, the language in the contracts will reflect that the terms are subject to the mortgage lender’s approval. When an offer is submitted, it could take the bank multiple months to respond. The process of selling a foreclosed house often takes longer than traditional real estate purchases. Many websites that sell foreclosed homes typically include the option to search by the status of the short sale.
Sheriff’s sale auctions occur after the lender notifies the borrower of the default. They are then allowed a grace period to catch up on their mortgage payments. The sheriff’s sale auction helps the lender to quickly get repaid on the loan in default.
It’s common for sheriff’s sale auctions to occur on the steps of a city courthouse with local law enforcement authorities managing the process. Then, the property will be announced to the highest bidder in a publicly announced place, date, and time. Check local newspapers and other online publications and search “sheriff sale auctions” to see what is currently available.
In the case that a property does not sell at auction, it becomes another bank-owned property, also referred to as a real-estate owned (REO) property. Institutions have a dedicated REO department to manage these properties. You can utilize online resources to find extensive listings of bank-owned properties, searching by city, zip code, or state.
When homes are purchased with loans guaranteed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), they are government-owned properties. As soon as these properties go into foreclosure, the government repossesses and brokers working for the associated federal agency sell them.
Government-registered brokers are the main point of contact for the purchase of government-owned property. If buyers are interested in purchasing this type of property, they can search for brokers in the U.S. Department of Housing and Urban Development (HUD).
Tips to Prepare You for Buying a Foreclosed Home
If you’re interested in buying a foreclosed home, here are some helpful tips to help you.
Hire a Real Estate Agent
Finding the right real estate broker is an essential first step in purchasing a foreclosed home. They will help answer your questions and guide you in the right direction. There are real estate agents who specialize in purchasing foreclosed homes, so you may want to consider seeking out this type of agent. Additionally, having the right real estate agent on your side can help you from making a purchase you may regret.
Wait for the Pre-Approval Letter
Not every buyer can afford to pay with cash. In this case, a mortgage pre-approval letter is necessary when you make an offer on a foreclosure. This simple letter helps separate casual lookers from those who are legitimately interested in purchasing something. These letters outline how much money that you’re allowed to borrow based on the assessment of your income and credit score. Being prepared ahead of time with the letter can make the process even smoother.
Look at the Comps First
Comparative market analysis, also referred to as comps, reflects the price that similar properties have recently sold for. As someone looking at foreclosed properties, you should plan to offer at least 70% of the comp price minus the amount that it will cost you to make any renovations or repairs. Paying more than the comps may automatically put you in a financial hole that you’ll have to climb your way out of.
Raise Your Bid in Time
Foreclosed homes don’t stay on the market for long. Expect an increased amount of interest and competition for these types of properties. Investors, professional house flippers, and standard residents will all be interested in scooping up a foreclosed property. If you are set on purchasing a foreclosed home, you may want to consider placing multiple bids on different properties as it’s likely another party will make an all-cash or over-ask offer. Don’t get discouraged, it could take some time to secure your ideal property.
Advantages of Buying a Foreclosed Home
There are many benefits to purchasing a foreclosed home. Here are only some examples.
1. Lower Purchase Price
One of the biggest advantages of buying a foreclosed home is a cheaper, marked-down purchase price. As lenders are usually highly motivated to unload foreclosed properties and get their money back, it’s very possible that you’ll be able to negotiate down a foreclosed property’s price.
2. Buying in Neighborhoods that Are Otherwise Out of Reach
Foreclosed homes also come with the potential to secure a home in a neighborhood that may otherwise be out of your price range. If you have kids and you have your eyes on a particular area, purchasing a foreclosed home gives you a unique opportunity to get your foot in the door in a place you may not be able to afford otherwise. Consider the school districts you could get into or the amenities that may come with particular areas.
3. Capitalize on Seller Concessions
When buyers close on a property, they incur closing costs. Purchasing a foreclosed home may allow for the lender to cover your closing costs or result in other financial concessions that make the property even more affordable.
Risks of Buying Foreclosed Homes
Buying a foreclosed home may also come with some risks that you should carefully consider.
1. Property Condition
If a home is foreclosed, it may be accompanied with property problems such as poor maintenance or damage. As many foreclosures stem from a lack of finances, the tenants may also fall behind on upkeep. In more extreme cases, the owners may also take out their financial frustrations on the home itself, removing appliances or causing deliberate vandalism. Once you see the property, factor in the rough amount of money it will require to make the necessary changes.
2. Further Costs
In addition to making any necessary repairs to the property, you should also factor in back taxes and liens that the IRS has initiated. These costs will quickly add up and make the property more expensive. The government must first be paid back before moving forward with the buying process. In most cases, this applies to properties that are auctioned off as a bank will pay off liens that are attached to the property before they resell it to another property.
3. Slow Process
If you’re in a rush to purchase a home, you may not want to consider a home in foreclosure. Foreclosures can take significantly longer to sell depending on the specific details. Banks can also drag the process on that much longer.
4. Increased Competition
Snagging a deal on a property is something that many people want. Potential occupants are often seeking a deal on foreclosed properties, so be prepared to be up against the stiff competition.
Our Final Thoughts on Foreclosed Homes
Purchasing a foreclosed home comes with many benefits. If you are patient, you can snag an incredible house at an even better price. If you are thinking about purchasing a foreclosed property, use the services of a real estate broker from 33 Realty. Get in touch with our team to get started.