How to Buy a Foreclosed Home

Purchasing a repossessed home was difficult prior to the mortgage crisis of 2007-2009. Real estate bargain hunters have to attend courthouse auctions or pore through reams of legal documents. The subprime crash resulted in a surge of foreclosures, which not only boosted the amount of available properties, but also made it easier to identify and acquire them. In truth, today’s approach is often comparable to that of finding any other type of residence.

Foreclosed houses can be found in almost every real estate market across the country, presenting opportunities for both homeowners and investors.

Important Points to Remember

  • Finding a foreclosed home for sale has never been easier. There are a lot of websites that specialize in them.
  • Pre-foreclosure, short sale, sheriff’s sale, and real estate held are all examples of foreclosures.
  • The reduced cost of a foreclosed home is a significant benefit.
  • The potential for a home to be in poor condition, the length of the purchase process, and competition from professional flippers are all negatives.
  • Foreclosed properties might take advantage of a number of government-backed financing options.

To learn how to buy a foreclosed home, play the video below.

How to Locate Bank-Owned Houses

Multiple-listing service (MLS) publications and websites, online real estate searches, bank offices and websites, and local newspapers are all good places to look for foreclosed properties. The foreclosure status of homes may not be highlighted per se in local multiple-listing services; the fact may only be indicated in the property description.

Lenders are increasingly selling seized assets through real estate agents, so don’t be afraid to inquire about chances with a real estate broker or agent. Some real estate agents specialize in the sale of foreclosed homes.

Various Foreclosure Stages

The actual location of a foreclosed home is determined by where it is in the foreclosure process.

In the early stages, such as pre-foreclosure and short-sale homes, properties can still be owned by the original homeowner, or by an organization such as a bank or the government (in the later ones).

Here are five different sorts of foreclosures and how to buy them.

Pre-foreclosures are the first step in the foreclosure process.

A property is in pre-foreclosure when the mortgage lender notifies the borrowers that they are in arrears, but before the property is auctioned off. If a homeowner can sell their home during this time, they may be able to avoid a foreclosure and the terrible impact it will have on their credit history and future chances.

Pre-foreclosure listings are commonly found at county and city courthouse buildings. Furthermore, several web services, such as Foreclosure.com, list homes in the pre-foreclosure stage.

2. Foreclosures

When a lender is willing to accept less for a property than what is owing on a mortgage, it is known as a short sale. A lender does not have to consent to a short sale if the borrower is not in default on their mortgage payments. They must, however, show that they have experienced financial hardship, such as the loss of a job, which is likely to result in default.

The home in question is frequently underwater, which means it is worth less than the existing mortgage debt. The lender must agree to “sell the property short” by accepting less than the amount owed, and the residence must be offered for sale in order to qualify as a short sale. These properties are frequently offered as “waiting bank approval” short sales.

Buying a short-sale property is similar to buying a standard home in most ways, but the contract language will differ, stating that the terms are subject to the lender’s approval. A bank’s response to a short-sale offer could take several months, making the process far lengthier than a typical purchase. Many real estate websites, including individual businesses and listing services, allow you to look for properties that are on the market for a short time.

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3. Auctions held by the sheriff’s office

After the lender has alerted the borrower of default and given the borrower a grace period to make up on mortgage payments, a sheriff’s sale auction takes place. The purpose of an auction is for the lender to be reimbursed swiftly for a defaulted loan.

These auctions are frequently held on the steps of a city’s courthouse and are overseen by local law officials. At a publicly advertised location, date, and time, the property is auctioned to the highest bidder. By searching for “sheriff sale auctions” in local newspapers and various online sources, you can find these notices.

4. Properties owned by banks

If a property does not sell at auction, it is reverted to the bank and becomes a real estate owned (REO) property. The REO department of the institution is often in charge of them. RealtyTrac, for example, has a large database of bank-owned properties that may be searched by city, state, or ZIP code.

5. Property owned by the government

Some properties are purchased with federal government loans insured by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). When these homes fall into foreclosure, the government seizes them and sells them through brokers who work for that federal agency.

To purchase a government-owned property, you must contact a government-registered broker. Buyers can look into their options on the US Department of Housing and Urban Development’s website (HUD).

Why Are Foreclosed Homes Less Expensive?

The most appealing feature of foreclosed homes is, of course, their reduced price—often much lower than comparable properties in the same region (referred to as “comparables” or “comps” in broker jargon). The majority of foreclosures are sold at a significant discount to market value, with the exact amount varied by area. Additional savings may be available in the form of smaller down payments, lower loan rates, or the removal of appraisal fees and some closing costs.

What makes these homes so appealing? The owners of a home in pre-foreclosure or short-sale status are in a financial bind—and time is not on their side. They need to unload the property and get as much as they can before they lose control of it. In other words, these sellers aren’t negotiating from a position of strength, and while taking advantage of others’ suffering may appear callous, buyers can benefit.

If the property has been confiscated, buyers can benefit even more. The sheriff’s office isn’t interested in keeping a house, and banks aren’t interested in becoming landlords. Financial institutions usually prefer to get rid of foreclosed properties as soon as possible (at a respectable price, of course—they have to prove to investors and auditors that they tried to recuperate as much of the original loan amount as feasible). Buyers might take advantage of this situation once more.

Finally, as used-car and vintage furniture connoisseurs know, foreclosed properties are frequently sold “as is”—if there’s damage, the owner isn’t responsible for repairs—and “as is” translates to a discount. Of course, as we’ll see later, “as is” might be a double-edged sword.

Buying Foreclosed Homes Comes With Risks

Buying a foreclosed house has a lot of advantages, one of which is the lower price. These features, however, are not without their drawbacks.

Property issues

While there is a compensatory discount, the condition as-is can be quite bad. If the house is still occupied, it may be in terrible condition—if the owners can’t keep up with their mortgage payments, they’re likely to fall behind on monthly maintenance, much alone major repairs. Furthermore, some people who are facing or have been forced into foreclosure are angry, and they vent their anger on their property before the bank reclaims it. This frequently entails the removal of appliances and fixtures, as well as intentional destruction.

Costs that aren’t visible

Delinquencies such as delinquent taxes and liens—which auction homes frequently have attached to them, either by the Internal Revenue Service (IRS) or by state or other creditors—can add additional costs to an otherwise appealing residence. Before the buying procedure can begin, whatever debts owed to the government must be paid and cleared. This is especially true in the case of auctioned properties; a bank will always pay off any liens on a property before reselling it to another party.

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The procedure is taking its time.

The aforementioned issues frequently result in a large amount of documentation. In most foreclosures, a lot of additional documentation must be completed in order to prepare for the closing, which isn’t usually quick. If it’s a short sale, the owner’s lender must approve the transaction, which, as previously stated, can take a long time. A reduced property appraisal may influence the buyer’s ability to acquire a loan if serious damage is discovered in the residence. Because the profit possibility on a smaller loan isn’t worth the risk, some lenders won’t lend below a specific monetary amount.

While you may believe a bank would be anxious to sell a repossessed home, response times between the bank and other parties associated with REO properties can be slow. The time it takes to receive a response to your bid might vary greatly; if the bank holding your home is overburdened with foreclosures, processing your request can take a long time.

It has been reported that banks with large backlogs can take up to 90 days to react to an offer. If you plan to finance the purchase, you should take the time to get a mortgage preapproval.

Competition

Demand will spike whenever there is a possibility to get something at a lower price than the going cost, as it does in any market. When dealing with valuable foreclosed properties, heightened interest and competition—not just from possible occupiers, but also from investors and professional house flippers—is unavoidable.

A foreclosed home can typically be found at a lesser price than comparable residences in the region. When news gets out, other offers can pour in quickly, resulting in a bidding war. As a result, what was once a bargain might quickly become a costly asset.

Prospective purchasers of foreclosed homes should submit multiple bids at once since rival bidders may be able to get a property with a better bid or an all-cash offer. Whether someone else beats your offer for a property, don’t become disappointed; instead, keep checking back to see if it returns in the bank’s inventory. Deals on foreclosures frequently fall through.

Buying a Foreclosed Property

If you’re buying from a bank, you’ll need to hone your negotiating abilities by making a lowball offer on the home you want. Banks with large inventory of foreclosed properties will be more willing to haggle over the price. The longer the bank has owned the property, the more likely it is to consider modest offers seriously. If the property you’re bidding on is located in a region with a high foreclosure rate, you should probably make your initial bid at least 20% below the current market price—possibly even more.

You’re in an excellent position if you can pay cash for the property and any necessary upgrades. That’s why some buyers form partnerships with outside investors who can assist them on the front end while also sharing any gains when the house is resold. Cash deals account for a significant share of REO sales.

Foreclosed Home Financing Options

An REO property can be purchased with a mortgage, while private lenders are wary of financing foreclosures. 203(k) loans from the Federal Housing Administration (FHA), Fannie Mae’s HomePath ReadyBuyer program, and Freddie Mac’s HomeSteps program are among the government-sponsored financing choices accessible to those who qualify.

203(k) loans are a type of loan that allows you to borrow money without

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The FHA created its 203(k) loans to alleviate the worries of banks that might otherwise be hesitant to purchase high-risk REO properties. The FHA is able to guarantee loans provided by private lenders who participate in the program by charging borrowers a mortgage-insurance premium.

One of the major benefits for borrowers is the flexibility to fund the house purchase as well as any necessary renovations in a single mortgage. A streamlined 203(k) loan is a simpler form designed for minor repairs that don’t necessitate engineering or architectural designs. Individuals can borrow up to $35,000 over the sale price of their house to cover basic repairs like new appliances, siding, and windows.

A typical 203(k) loan is usually the best option for more costly repairs, such as adding an extension or repairing structural damage. Unlike the simplified option, homeowners must withdraw at least $5,000; the maximum amount is determined by FHA regulations in each county. You must also pay for an independent consultant to evaluate the property and verify that the work complies with the program’s requirements.

The cost of these loans is also a disadvantage. Borrowers often pay interest rates that are a quarter of a percentage point higher than those on traditional loans, in addition to paying mortgage insurance. They may also be required to pay one or two points, which are one percent of the principal amount.

The traditional 203(k) loan and the simplified form are compared.

 

The Federal National Mortgage Association (FNMA)—or Fannie Mae as it’s fondly known—offers the HomePath ReadyBuyer program to first-time purchasers. Participants can receive up to 3% in closing cost assistance toward the purchase of a foreclosed property owned by Fannie Mae after completing a necessary homebuying education course, which can be completed online.

Homebuyers may be required to put down only $500 in earnest money, and private mortgage insurance may be eliminated if your equity in the home reaches 20%, among other benefits offered by this government-sponsored company.

HomeSteps

Freddie Mac helps the mortgage market by purchasing loans from banks, pooling them, and selling them as securities to investors. HomeSteps provides unique financing to customers who want to acquire just the foreclosed properties that the organization owns, thanks to its private lending partners. Currently, HomeSteps is only available in the following states:

  • Alabama
  • Florida\sGeorgia
  • Illinois
  • Kentucky
  • North Carolina is a state in the United States.
  • South Carolina is a state in the United States.
  • Tennessee
  • Texas\sVirginia

If you live in one of these states, HomeSteps can help you save a lot of money. One of the biggest differences between it and 203(k) loans is that you don’t have to acquire mortgage insurance. This alone can save purchasers hundreds, if not thousands, of dollars over the life of their loan. A HomeSteps mortgage also doesn’t require an appraisal at the time of application, which can be a huge stumbling block for people looking for a conventional loan. On the HomeSteps website, buyers can access a list of single-family, condo, and multifamily properties.

Final Thoughts

Foreclosed properties can appear to be very enticing on the surface. Costs, on the other hand, can be highly unpredictable, and underlying deterioration can make a property unappealing. The buying procedure is often slow, which may cause some buyers to reconsider, while high demand for appealing foreclosed houses may drive away other potential buyers.

With all of this in mind, foreclosed properties can be fantastic bargains. Buyers have a one-of-a-kind opportunity to pay less than market value for properties that they would not otherwise be able to afford. If there are savings on the purchasing side, the buyer’s chances of obtaining asset appreciation as well as investment gains if they sell in the future are increased. If done correctly, buying a foreclosed home can provide a buyer with a slew of advantages for years to come.

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