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Buying a Foreclosed Home

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The real key to successfully buying a foreclosed home is in understanding the entire foreclosure process. In today’s competitive real estate market, you need to be open to options like buying foreclosures or real estate owned (REO) properties. It’s no secret that you can get a great deal on foreclosures, but it can also be a tricky and confusing process. Understanding how to find foreclosures, who to use when buying and what kinds of mortgages are acceptable will help you succeed in becoming a homeowner of a foreclosed property. 

How to Find Foreclosed Homes 

Foreclosed properties can be found on your local multiple listing service (MLS). In addition, there are numerous websites that specifically post pre-foreclosed and foreclosed homes. They may be listed as HUD homes, bank-owned homes, foreclosures, distressed properties or tax lien listings. These are all properties where the borrower has defaulted on the mortgage; however, a tax lien foreclosure means the borrower has failed to pay the taxes. This includes property taxes as well as federal and state taxes. 

The steps to buying a foreclosed home are very similar to buying a traditional home. A real estate agent who has experience in the buying and selling of foreclosed homes will be an asset here. Your real estate agent can help you along the way with any questions you may have regarding fair offers, conditions and timelines. 

  • Visit the property. You will set an appointment to see the foreclosed property. Keep in mind that bank-owned homes are usually “as is,” and the bank just wants to unload these homes and get its money — it does not want to fix anything. 
  • Submit an offer. Along with your pre-approval from your preferred lender, your real estate agent will submit a reasonable offer for the foreclosure home, considering the current market and the condition of the house. 
  • Do your due diligence. If accepted, you move on to the home inspection and the appraisal. It is important to inspect so you know what you are getting yourself into. If the septic or well is no good, you will be in charge of replacement or repairs. Your mortgage lender also will require an appraisal of the home to be sure the value of the foreclosed property is equal to or above the value you are borrowing. Make sure your title company does a complete search on the property too. You will need a clear title to purchase. Sometimes back property taxes or liens as well as ownership claims can come up during this search and prolong the process while things get sorted out. 
  • Reach a closing date. While you are waiting on your mortgage commitment and title company, many different departments within the bank must see and clear all of the paperwork before a closing date can be locked in. This is a main part of the transaction where dealing with the bank and dealing with a traditional seller differs. A bank can take a lot longer to move the process forward.

How Much are Foreclosed Homes?

Generally, foreclosed homes are offered at market value. The current market conditions, as well as comparable homes sold in the last year, are major factors. The square footage, lot size and condition of the home and property are also important features. As the bank wants to recoup as much of its money as possible, how much is still owed on the house also comes into play in determining the price for a foreclosure property. 

The value of these bank-owned homes, however, can range from turnkey to unlivable conditions. As a homebuyer, the main issue with buying a foreclosed home undoubtedly will be its condition. When a homeowner is down on their luck and losing their home, a lot of times they decide to wreck the house before they leave. They punch holes in the walls, spray paint walls and ceilings, break windows and doors, even pour cement in the toilets. This will bring the value down, and the bank will ask for less for properties like this. Then with a construction loan or some cash set aside, you can fix the house up to whatever you want it to be. Properties that are this bad are hard to secure a traditional mortgage loan with, however, and you will need to speak with your lender for the best option. Just make sure you don’t fall behind on your mortgage payments… or the same thing can happen to you!

The real estate market the property is in also will affect the pricing. If it’s a popular city with a competitive market, the bank can absolutely still see over-asking offers. Location is a huge part of real estate investing success. On the other hand, if this foreclosed property is in the middle of a run-down town with many other foreclosed properties, the bank won’t get much for it and will have to take whatever it can with hopes of not losing too much money. 

The Stages of Foreclosure

In order for a property to get to the point of a foreclosure sale, several steps have to take place. 

  1. The borrower defaults on the mortgage payment for 4 consecutive months (depending on the state this timeframe will vary). This may be because of job loss, death or injury. A missed payment notice will be sent after the first missed payment. If no arrangements have been made to satisfy the default, the loan will be sent to the foreclosure department of the borrower’s current lender. The lis pendens will be recorded with the town.
  2. There is a reinstatement period or redemption period where the lender gives the homeowner 90 days to settle. With still no arrangements made to pay off the owed amount, a Notice of Trustee’s Sale will be recorded and the public auction will be scheduled. The borrower is now in preforeclosure.
  3. The public auction will be held, and the highest bidder (with proof of eligibility) will move forward with the purchase of the property. 
  4. If there is no purchase made during the public auction (opening bid was not met), the property becomes real estate owned by the bank and placed with a broker to get the foreclosure sold. 
  5. An eviction notice is sent to anyone living on the premises. The sheriff may come by to make sure that the residents have gone. 

These are the most basic steps of the foreclosure process, called judicial foreclosure. The borrower defaults, has a chance to make things right, and if not, the house is auctioned off or sold. Some states offer a nonjudicial foreclosure where the foreclosure is handled outside of the courts and directly with the borrower and the lender. Banks don’t like to do foreclosures. As the mortgage holder, they are already losing money and the foreclosure process costs them money as well. 

Pros and Cons of Buying a Foreclosed Home

As with any investment opportunity, buying a foreclosed home has its pros and cons. 

PROS: 

  • Price: Yes, you can get a foreclosed home at a great value. You may get 20% to 30% off of a home in the area you are looking to buy. With the right location and size, this could mean a great starter home or flip home.
  • Investment opportunity: If you are a real estate investor who knows what you’re doing, snagging a foreclosure in a hot market will make you a great profit. Many people shy away from foreclosures because they don’t have the cash to fix them up or don’t really understand the process.

CONS:

  • Distressed property: Foreclosed homes generally need a lot of repairs, and they are sold “as is.” Many times these homes have been unoccupied for years, and the last owners are nowhere to be found to give information about the condition. Not knowing the extent of the repairs when purchasing a bank-owned property, you could end up dumping more cash into it than you planned or even running out of money to finish repairs. 
  • Lenders: it can be hard to close a home loan on a foreclosure property, so they usually end up selling for cash. Most borrowers with a VA (veteran) Loan or Federal Housing Loan (FHA) loan will not make it through their strict guidelines. However, it’s not impossible.

Using a Real Estate Agent to Buy a Foreclosed Home

If you are going straight to a sheriff’s sale or foreclosure auction, all you need is a cashier’s check, cash or a money order to make the purchase. However, if the property has moved to a bank-owned foreclosure, it will be listed with a seller’s agent, and you will need a great buyer’s agent to guide you through the process. 

A few things to keep in mind when using a real estate agent to buy a foreclosed home include whether they have experience in foreclosures, are familiar with the area?.Your best bet as a prospective homebuyer is to ask around to family and friends who may know a trusted real estate agent in the area you are looking to purchase in. From there, find out if the agent has experience in buying foreclosures.

Using an experienced real estate agent will help the whole transaction flow smoother and be less stressful. Your agent works directly with the seller’s agent so that you don’t have to. Agents take care of all necessary paperwork, as well as offer you expert advice all along the way. From inspection reports to title issues, they’ve seen it all and will help guide you in the best direction. They also have access to the property as well as any reports found on the MLS.

Financing Options for Foreclosed Homes

Ultimately, your financial situation and credit score will determine how to pay for your foreclosed home. Here are the most common financing options:

Cash. Always popular, useful and a No. 1 choice.

Conventional loan. A conventional loan is ideal if the home is not in a great deal of distress. If it just needs some minor repairs or cosmetic work, this is the way to go. 

Renovation loan. A renovation loan is ideal if the foreclosure needs a lot of work. You will need to use a contractor for repairs, and the funds will be disbursed as needed.

FHA loan. It is possible to work with your mortgage lender on an FHA loan if the property is not going to be a flip house or investment property. These loans are more strict and meant for homes that are in good condition. However, you can put very little down and get great rates. 

203K loan. An FHA 203K loan is achievable for some minor repairs or upgrades.

Hard money loan. This type of loan has higher down-payment requirements and interest rates but can have funds available almost immediately.

USDA loan. If you are buying a foreclosure in a rural area and have a low income, you may be eligible for a United States Department of Agriculture (USDA) loan. These loans have certain restrictions and requirements but can be great for areas of less than 20,000 people. 

VA Loan. VA financing can be challenging when purchasing a distressed home. The guidelines suggest that the home be move-in ready as well as free of any safety hazards. 

Finding Foreclosures Before They hit the Market

There are several ways to find foreclosures before they hit the market. Discuss what you are looking for with your local real estate agent, or do your research online. Bank websites and public records are an easy way to find foreclosure and preforeclosure listings. Sheriff’s sales are listed in the newspaper advertisements and outside your sheriff’s office.  

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Even driving by distressed properties in areas you want to buy in could lead to something. Maybe they have a notice on the door, and you can have a chance before it’s bank owned. In the current real estate market, it doesn’t hurt to ask around to friends and neighbors and even other real estate investors for any foreclosure opportunities that could be out there. 

Right now is a great time to dive into the foreclosure market. Whether you’re an investor or making a home purchase for yourself, understanding foreclosures will give you a lead over a lot of other potential buyers in this competitive real estate market.