Problems With The Purchase
Foreclosures can still be a good deal despite all of these potential problems. If you are willing to fix issues that most people don’t want to deal with, you can purchase a home at a significant discount. However, you may encounter additional problems when buying the property and improving it to move-in condition.
Lenders will not give homebuyers money for a dwelling that they consider uninhabitable or appraise below the purchase price. If you are an investor paying cash, this will not be a problem. The HUD Section 203 program can also help in some circumstances.
Common sense says that banks should want to unload REOs as quickly as possible, but in reality, banks sometimes drag their heels in considering offers and throughout the escrow process.
Foreclosure Auction Risk No : You Can’t Inspect The Property
Challenge: You cant get inside the property before the auction to inspect it for structural problems and repairs. Many foreclosure auction properties are in bad shape because the owners couldnt afford the upkeep. And sometimes angry homeowners purposely damage the property to punish the foreclosing lender.
Solution: Walk around the home to check its exterior condition. If its vacant, look through the windows. Ask the neighbors what they know about the property. If it was a rental, check the inspection records on file with the local government.
Who Can Buy A Pre
Typically, buying pre-foreclosed homes has been the domain of investors, Blomquist states. But anyone is able to buy them with the right funding and patience.
Pre-foreclosures are not for the faint of heart either. It is a higher risk property. Sometimes, they can be in bad shape either from maliciousness on the homeowners part or just because they havent had any extra money to maintain the house.
Understand The Options For Buying A Foreclosed Home
There are two main ways to purchase a foreclosure:, at an auction or from a lender after they have failed to sell at auction.
Purchase Through Short Sale
A short sale occurs when the homeowner sells a home for less than what they owe on the mortgage because the value has declined. Foreclosure has not been completed. The homeowner still owns the home so you work through their REALTOR®.
When you buy a home in a short sale, the lender needs to approve your offer. You might spend a lot of time waiting for approval.
Purchase At Auction
Youll get a home faster at auction than you would if you negotiated with the bank or a seller. Homebuyers also have the opportunity to buy a property significantly below at auction. However, most auctions only accept cash payments, which means that youll need to have a significant amount of money ready for the purchase.
If the auction does allow for financing through a mortgage, you want to make sure that you have a preapproval ready. Its important to realize that not all approvals are the same. We recommend a Verified Approval1 where your income and assets are verified.
By purchasing at an auction, you also agree to buy the home as-is without an appraisal or inspection. This means you take a big risk when you buy a foreclosed home at an auction. Speak with a real estate attorney if this is something youre interest in.
Purchase From A Lender
Who Should Not Buy A Foreclosed Home
Shopping for a foreclosed home is time-consuming and frustrating. Finalizing a deal is worse.
If you need a home right away, or you aren’t emotionally prepared to handle repeated disappointments, you probably shouldn’t take this on.
It’s also a bad idea if you’re shopping at the top of your budget. You may well need some extra cash to cover unexpected costs.
Read Also: How To Find Out If Company Filed Bankruptcy
Get The Most Up To Date Title Information
A title search is always recommended for any real estate transaction. A title company will check the property for liens as well as verify that the deed to the home is correct. A title search is especially important when buying an REO property due to the unique transfer of ownership at foreclosure. There may be liens on the title that may not be uncovered until the closing process begins. Again, a real estate professional who is experienced in foreclosed homes can be a valuable resource in guiding you through this process.
Search For Foreclosed Homes Near You
You’ll see properties that are marked as foreclosures or pre-foreclosure on the MLS and on real estate listing websites that pull from the MLS. But that’s not the only place to find foreclosures.
Auctioneers are legally required to post notices of sheriff’s auctions prior to the sale. This means there’s a sign on the property and, perhaps more easily found, a notice in the local newspaper, which includes on the paper’s website. Some cities and counties host larger auctions, which may include empty building lots or former municipal buildings.
Government agencies and government-sponsored enterprises sell foreclosed homes. This includes Fannie Mae, Freddie Mac and the Department of Housing and Urban Development. Their sales tend to be geared toward first-time home buyers who intend to be owner-occupants rather than real estate investors.
Websites that specialize in home auctions, like Hubzu and Auction.com, feature foreclosed properties. Watch out for “convenience” charges, which usually have to be paid directly to the auction site.
Due to the pandemic, the government-sponsored enterprises and agencies that back home loans have halted foreclosures. Some local governments have also paused tax auctions. Combined with the large number of people looking to buy homes, struggling homeowners may be able to sell rather than face foreclosure. On the whole, this means that there may be fewer foreclosed homes on the market than usual.
Recommended Reading: Best Site For Foreclosures
Foreclosure Auction Risk No : Unclear Market Value
Challenge: You need to figure out the market value of the house to prepare your bid. Some foreclosure auction announcements include information about the size of the original mortgage. Thats not how much the house is worth or even what the owners owe now. If the current owners bought at the top of the market, their mortgage may be more than the home is worth in todays market, and they could owe even more if theres a second mortgage on the house.
Solution: Commission your real estate agent to do a brokers price opinion on the home you want to bid on. The BPO will show comparable sales, telling you how much similar, nearby homes that werent foreclosure sales have recently sold for.
Bid well below those comparable sales to leave yourself room to pay for repairs and unexpected problems. Ask the agency that runs the auction how to find winning bid amounts from recent auctions. Use that information to guide your current bid, too. A look at local tax and assessment records will tell you more about previous and current auction properties, like square footage and lot size.
What You Need To Know
Anyone with an interest in real estate may be tempted to buy a foreclosed home, a property on which the owner stopped making mortgage payments. The low prices lure home buyers in search of a deal, and they also tempt people aiming to flip the place for profit. The process of acquiring a foreclosure, however, can be far more complicated and time-consuming than it appears on reality TV shows. We asked people across the country to share cautionary tales of the obstacles that sour these seemingly sweet deals. Read on for the rude awakenings!
Recommended Reading: Can You File Bankruptcy For Student Loan Debt
Research The Different Methods For Buying A Foreclosure
As with any major purchase, the first step in purchasing a foreclosed house is research. Thats because there are several different ways to buy a foreclosure, and the best method for you may vary depending on your needs.
Here are the most common purchase paths to consider.
Buying From The Homeowner
A pre-foreclosure, or short sale, can occur when the homeowner still owns the property and knows theres a potential for foreclosure. Owners want to sell their home before they end up in foreclosure. This means that short sales arent technically foreclosure sales.
Short sales can also prove to be challenging. In a short sale, owners get permission from their lender to sell their residences for less than what they owe on their mortgage. If the owners owe $180,000 on their mortgage, they might still list the home at $160,000 even though such a sale leaves them $20,000 short of being able to pay off their entire mortgage loan.
In some short sales, the owners bank agrees to take this loss as a way to get the home sold and the mortgage off their books.
The goal for the owners is to offer their home at a price thats low enough to ensure a quick sale before they fall behind on their monthly payments. Buying at this stage can be tough, though. Even if the sellers agree to your offer, their bank or lender might reject it if its too low.
Buying At An Auction
There are also plenty of risks:
Buying From The Bank
Buying A Government-Owned Property
Why Foreclosed Homes Are Cheaper
The biggest selling point of a foreclosed home is, of course, its marked-down priceoften significantly lower than similar properties in the same area .
Most foreclosures are sold at a sizable discount from , with the exact amount varying from region to region. The seller may offer additional incentives such as a reduced down payment, lower interest rate, or the elimination of appraisal fees and some closing costs.
What makes these properties such a deal? If the residence is in the pre-foreclosure or short-sale stage, its owners are in a financial bind, and time is not on their side. They have to unload the property and get what they can while they can before they lose possession of it.
In short, these sellers arent negotiating from a position of strength and, while it may seem cruel to take advantage of their misfortune, a buyer can benefit.
The buyer can benefit even more if the property has been seized. The sheriffs office isnt interested in hanging onto a house, and banks dont want to be in the landlord business. Financial institutions typically want to rid themselves of foreclosed properties promptly. They need to get a reasonable priceThey have to answer to their investors and auditors. Still, buyers have an edge.
You should know that foreclosed homes are usually sold as is. If theres damage, repairs by the owner arent part of the equationbut, as used-car and vintage furniture aficionados know, as is translates into a discount.
Don’t Miss: Are Student Loans Included In Bankruptcy
Find Foreclosed Homes In Texas
Inexperienced buyers should probably focus on pre-foreclosures or REOs because they’re more similar to traditional home buying.
Properties in these stages of foreclosure are often listed on the local MLS, which means your agent can alert you to them before they appear on popular real estate sites. You can also find these properties by filtering for foreclosures or auctions on sites like Zillow or RealtyTrac. For government-owned foreclosures, you can go to the HUD home store.
Only consider auctions if you’re experienced in real estate, have substantial cash reserves, and are willing to take the risk of buying a home you haven’t seen.
You can find auctions listed in the real estate or classifieds section of your local newspapers or onmypublicnotices.com â just search “foreclosure sale” under the category search drop down.
In Texas, HAR.com is another popular site to find properties of all kinds.
Â» MORE: Trying to scale your real estate portfolio by buying foreclosures? Check out Deal Machine for generating and tracking leads.
Six Steps To Buying A Foreclosed House
If you are a first-time home buyer or an investor with a limited budget, chances are, youve considered buying a foreclosed home.
Foreclosed houses in Canada could be quite rare. Most lenders may not want to go through the foreclosure process as it can be expensive and time-consuming. Generally, lenders may revoke the homes title once four loan repayments have been missed, although this may vary from province to province and lender to lender.
Once repossession is finalized, the borrowers may have 30-35 days to vacate the premises. During the foreclosure period, most lenders may still be open to negotiation. The borrowers have to prove they can make the repayments again. However, if the lender thinks the borrower cannot fulfil their mortgage commitment at all, they can repossess the property and sell it in one of two ways.
Foreclosed property saleAs mentioned, a repossessed house can be sold by the lender in two ways:
- Judicial sale. In this type of sale, the lender has to petition to the judicial court for permission to sell off the property. It can get expensive and time-consuming, involving a lengthy court case and legal fees. Lenders may begin the foreclosure process after the first loan payment defaults. Soon after, the legal proceeding may start wherein the borrower will be served with a Statement of Claim for Debt and Possession. They will also be given 20 days to file a Statement of Defence in response.
You May Like: Is The Nra Filing For Bankruptcy
What Is A Foreclosure
Foreclosures happen when a lender takes a property from an owner who has fallen behind on payments and defaulted on their mortgage. Lenders will then try to recoup as much of their investment as possible by selling a foreclosed home for slightly less than it might be worth. In the right situation, you are getting something below market value because the bank is motivated to get the home sold, says agent Rose Sklar of the Sklar Team at Coldwell Banker in Weston, Florida.
Establish Your Price Point
Before you start searching for a foreclosed home, you should think about what price range you want to stay within. Consider your monthly income, how much you spend on groceries, the average amount you can afford to put toward household bills, repairs and mortgage payments. This will help you determine what house price you can afford. From there, you can establish an overall price point to focus on.
How Does A Home Enter Into Pre
Unfortunate life circumstances can cause anyone to fall behind on mortgage payments, Blomquistsays.
Its different these days from when people just got bad loans and got in trouble during the mortgage crisis. Now, the common reasons are death, divorce, and loss of job. These can disrupt lives, Blomquist explains. These arent people who just forgot to pay the mortgage month after month.
A Few Words Of Caution
Distressed properties are generally sold as-is, as in what you see is what you get. There are no warranties so make sure a certified inspector looks over the property before you make an offer. You need to know how much it will cost to make the place habitable or flippable.
Lenders typically clear the title before listing a foreclosure, but its wise to hire a title company to research and cure title problems before closing on the property.
Its also a good idea to have your financing lined up before making a bid. But even if you offer cash, dont expect a deal on a bank-owned property to proceed quickly. Multiple pairs of eyes must review the deal and respond to your offer. It could take weeks, so be patient.
The Bottom Line: Is Buying A Foreclosed Home Right For You
Buying a foreclosure can be a unique opportunity for homebuyers looking to pay lower prices or below market value or for complete home restoration projects. Keep in mind that many foreclosed homes could have severe damage and structural issues, and are usually sold as-is.
Get in contact with an experienced real estate agent if you want to take a risk on a foreclosure. Your real estate agent will help guide you through the foreclosure process, because most lenders dont sell to individual buyers.
Once you find a home youre interested in, get an appraisal and property inspection completed. Youll also need to secure funding with a mortgage preapproval. Follow up with your lender and agent to finalize the sale once the results of your inspection look acceptable.
If youre ready to get a mortgage approval, get started online!
Find a local pro.
What Is Preforeclosure
When a house is in preforeclosure, this means that the homeowner has fallen behind in payments and the lender is starting to take action. Perhaps the lender has filed a notice of default or started a lawsuit to officially begin the foreclosure process, but the foreclosure sale has not yet taken place.
During this preforeclosure period, the homeowner typically has a certain amount of time in which to try to catch up on past-due mortgage payments plus fees, sell the home to pay off the loan, or work out an alternative to foreclosure with the lender, like a mortgage modification, short sale, or deed in lieu of foreclosure.
Don’t Miss: Can Student Loans Be Included In Bankruptcy
Can You Finance A Pre
Yes, you can get a loan for a pre-foreclosure but if there is competition for the house it will likely go to the the cash buyer first.
Bloomquiest recommends getting prequalified for a loan before ever making an offer. Youll then know how much you can afford for the house and for any repairs.
Banks are always happy to give loans on properties even if they arent listed for sale, he explains.
First Order Of Business: Know Market Values
Your entire foreclosure adventure will rise and fall on your knowledge of the market area where youre purchasing the property. The more you know about values in the area, the greater the likelihood of success.
A foreclosed property has two valuesthe purchase price youre likely to buy the house at, and the market value that the finished property is likely to sell for. The difference between the two will determine how much money you should spend on rehabilitating the property, and how much profit you can expect to make on the trade.
There are different ways you can make this determination. A quick method is to use online resources, such as Realtor.com and Zillow.com. Both sites provide a high altitude look at the value of a property, or at least the general neighborhood.
Thats a good starting point, but youll have to drill down deeper, eventually. If you plan to make an offer on a foreclosed property, youll have to have a more accurate picture of what the specific completed value is likely to be. The best source for this information is a trusted real estate appraiser. With just the address, an appraiser can determine final market value based on sales of comparable homes in the area.