Buying Foreclosed Homes For Dummies

And If Youre The Winner

Be ready for things to move fast. With Auction.com, for example, the contracting department will contact you within two hours and walk you through the online purchase and sale agreement, which shows the total purchase price and the timeline for submitting documents and payments. Make sure that escrow receives your documents and payments on time otherwise, you could lose your earnest money deposit.

Look closely at the property page for each property you are planning to bid on. Many properties have whats called a buyers premium, which is the fee charged by the auction company for conducting the sale, from marketing through the closing. The amount can vary, but its usually 5% of the winning bid amount. Many properties dont have a buyers premium because the bank or seller has arranged to pay this fee out of their proceeds from the sale.

What Is A Pre

With home prices rising in some areas, a pre-foreclosed home can be quite attractive financially.

When a property is in pre-foreclosure, the owner still has a chance to ward off a foreclosure by getting enough money to pay the bank or sell the property to pay off the loan.

A buyer comes in and gets a home at a discount from the full market value without the house ever going on the market, says Darren Blomquist, senior vice president at Attom Data Solutions, parent company of RealtyTrac in Irvine, Calif. It can be a win-win situation for everyone.

If they can do that, they can likely walk away with a little equity in the home and while avoiding a bad credit mark that comes with a foreclosure a mark can last seven years.

These went out of vogue during the housing downturn, but they have come back, adds Blomquist. There are fewer of them now. But since the housing market is on fire, people are looking for bargains.

What Types Of Properties Are Sold At Auction

While virtually any type of property or asset can be sold at auction, most home auctionsand the type youve probably heard the most about, thanks to the housing crisisare foreclosures. Depending on the state, a trustee assigned by the lender or an officer of the court conducts a foreclosure sale to recover the balance of a loan from a borrower whos defaulted on their mortgage payments. We estimate the foreclosure backlog will have grown to more than 1.1 million residential properties by the end of the first quarter of 2021, said Daren Blomquist, vice president of market economics at Auction.com.

There are two types of real estate auctions: live and online. The latter is becoming more and more prevalent as people grow more comfortable with making major purchases online.

No matter which route you choose, remember that home buying can be complicated. Companies like Auction.com are making the process more efficient and transparent, but in most cases there are still long contracts, escrow, disclosure documents and other paperwork required by law.

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Buying A Foreclosed Home

Purchasing a foreclosure isnt as complicated as it sounds.

Yes, the process can take a little longer, and youll have to jump through some hoops. But its not much different than buying a normal house.

Plus, if it means shaving several thousand dollars off your bill, aren’t a few extra steps worth it?

Before we get into those extra steps, lets look at some of the different types of foreclosures you might run into during your search.

There Could Be Delays

Need to be out of your house and into your new one within a month or two? The foreclosure market is probably not for you.

Buying a foreclosure is more complicated than buying a traditional property. The foreclosure process includes waiting periods, which vary from state to state. If youre buying from a bank, there are often layers of approvals necessary along the way. If so much as a single signature is missed or a document isnt filed correctly, previous owners may be able to file for bankruptcy protection, which will stall or, perhaps, stop the sale. In some instances, post-sale legal issues can delay the closing for weeks or even months.

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Do Your Due Diligence

Many online auction sites provide a wealth of information on the property page, including maps, estimated resale value and any liens. Be sure you read it all! Its also a good idea to conduct your own due diligence, including a title search, and seek independent advice from a real estate agent or broker, a real estate attorney, or another experienced investor. Unlike live foreclosure sales, most homes sold in online auctions do have an agent commission , which allows an agent to get paid for their services.

As with foreclosures, visit the property if youre local. The real estate agent may even offer open houses if so, bring your contractor with you to help you assess what repairs might be needed.

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.

Lee Nelson

MyMortgageInsider.com Contributor

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Choose A Foreclosed Home To Buy

Whether you bid at an auction or negotiate for an REO through your agent, the third step is execution. This is when you put an offer on a home that fits your budget. Youll want to make sure your budget saves room for inspections, closing costs, insurance, property taxes, repairs and renovations. If you find something at the top of your means when buying a foreclosure, you may not be able to cover all the necessary expenses.

You can find real estate auction listings online, through real estate agents, in local newspapers and at your local city hall or court. You can find REO listings directly through banks and through larger real estate sites like Zillow. Keep in mind that it make take a bit of time for the bank to respond to any of your requests, including a request to view the property or a bid to purchase the home. You must be patient but having an experienced representative will help speed up the process if its at all possible.

The Home Wont Be Inspected

If you buy a property at a foreclosure auction, not only will you not get a chance to have the home inspected, its likely you wont have stepped in the door before you become the legal owner.

No inspection means you wont know about necessary repairs until its too late. Its possible the property has been vandalized or looted appliances and light fixtures may be missing. If the home has been vacant for some time, its pipes may have frozen or it may now be home to new tenants, in the form of rodents and bugs.

Many buyers find its a better option to purchase bank-owned or real estate owned properties. Typically, once the bank owns the property, it addresses any outstanding issues. When buying an REO property, you can and should have a home inspection done as a contingency to purchase.

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Other Ways To Find Foreclosed Homes

Other ways to find foreclosed homes include property websites listing foreclosures search online for foreclosures or REO property investor networking clubs, big-bank websites like Wells Fargo or Bank of America, and the websites of government-sponsored companies like Fannie Mae and Freddie Mac.

California Homeowners’ Right To Redeem After A Judicial Foreclosure

If the foreclosure is judicial, the homeowners may redeem the property within:

• three months after the foreclosure sale if the sale proceeds were sufficient to cover the total debt that the homeowners owed, or
• one year after the foreclosure sale, if there was a deficiency. .

However, if a deficiency exists and the lender waives the right to get a “deficiency judgment” or California law prohibits a deficiency judgment under the circumstances, the former homeowners don’t get any redemption period. ).

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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

Differences Between A Typical Real Estate Transaction And The Purchase Of An Reo Property

Negotiating the purchase price of a foreclosed home may take a little longer than a typical real estate transaction because the process may require multiple levels of approval. First, the bank will have to approve the offer. In some cases, an investor may own the property and will have to provide approval as well.

Pricing for a foreclosed home is typically set at market value in an effort to move the property quickly. You will want to submit a fair and reasonable offer, as most banks will list properties at a fair price.

There are several considerations to keep in mind when purchasing an REO Property:

• Unknown property condition

• Given that the bank has not maintained or had first-hand knowledge of the foreclosed home prior to acquisition, there may be no record of property repairs or maintenance that would assess the true property condition. As a result, the bank is often unable to verify the condition of the property or complete a Sellers Disclosure.
• Buyers are allowed and encouraged to complete professional home inspections on the property.

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Buying Foreclosure Homes At In

The phrase real estate auction often brings to mind the stereotypical image of a small group of investors, huddled around an auctioneer on the county courthouse steps. And in fact, almost all foreclosure auctions are conducted live in front of county courthouses. Many states only require a publicly accessible space, like a hotel ballroom or room in a convention center. In some of these larger venues, hundreds of foreclosure properties might be auctioned on a single day.

Some of the larger counties in Florida now conduct foreclosure sales online Wayne County Mich., the county in which Detroit is located, conducts online tax lien sales . The laws vary widely from state to state, so be sure to check out the specific rules governing your state.

Live foreclosure auctions are free to attend and open to the public to ensure that a home being foreclosed upon receives the highest possible recovery for the bank or lender and the smallest deficiency for the borrower. Anyone can attend however, if you want to bid, youll need to register. In almost all cases, youll have to show that youre in possession of sufficient funds to pay for the property in full. .

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.

For more details about buying foreclosed properties, check the Foreclosure Buyers Guide in Zillows Foreclosure Center.

MORTGAGE CALCULATOR

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Make A Competitive Purchase Offer

If the home is in pre-foreclosure, your real estate agent will need to present the offer to the individual who currently owns the home.

If youre looking at a foreclosed home thats headed to auction, youll need to contact the trustee or attorney whos running the auction to ask any questions about the house before the auction takes place.

A trustee is a third party who runs a foreclosure auction on behalf of a lender or government agency. This official accepts the bids during an auction.

If the house is REO, your agent will present your offer directly to the banks listing agent.

A buyers agent will never have direct contact with the bank. The process is similar for government-owned listings: Your real estate agent will again present your offer directly to the government agency listing the home.

You might be tempted to make a low offer on a foreclosed home. Its true that foreclosed properties often sell for less than traditional homes. But if you make an offer thats too far below , the sellers might reject it.

Its important, then, to work with your real estate agent to make a competitive offer. Your agent will advise you on what this figure should be.

You should also include a contingency for a home inspection in your offer. This contingency says that the home sale cant be finalized until youve scheduled a home inspection of the property.

Hire A Real Estate Agent

Most lenders hand foreclosed properties off to an REOagent who works with standard real estate agents to find a buyer.

Not every real estate agent has experience working with REO agents. A qualified foreclosure agent can help you search for foreclosures, navigate your states REO buying process, negotiate your price, order an inspection and make an offer. Research real estate agents in your area and connect with an agent who specializes in foreclosure sales.

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Look At Comps To Determine What To Offer

Finding the right price to offer is as much an art as it is a science. Your agent can run a comparative market analysis , which helps you understand recent sale prices of comparable properties, or comps.

Soffee says he runs a CMA from the last 180 days and evaluates several factors, including the pace of home sales, tax assessment history and a deeper analysis of similar properties nearby that have recently sold.

If youre up against cash offers, knowing this information can help ensure your offer is a competitive one. Your lender will require an appraisal to assess the homes value, so keep that in mind when making your offer, as well. If theres a shortfall between your offer and the homes appraised value, you might have to make up the difference in price if the bank doesnt budge.

Buying A Foreclosure Home At Auction: The Basics

If youre interested in buying real estate as an investment, the local multiple listing service isnt your only option. Real estate auctions are growing in popularity. Experienced investors often buy property this way, but technology has simplified the process and has made it less intimidating to new investorsas long as you do your homework and use free tools from Auction.com to find homes close to you.

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Get A Preapproval Letter

Unless you can afford to pay cash, youll want a mortgage preapproval letter in hand when you make an offer on a foreclosure. It separates the lookers from the buyers, Soffee says.

Preapproval letters detail how much money you can borrow based on the lenders thorough assessment of your finances, including credit score and income. Its always good to be prepared, Sklar says. Having your proof of funds will make it an easier transaction.

Youll also want to consider what kind of loan to get preapproved for. Foreclosed properties often require repairs or upgrades, and an FHA 203 loan can help. These loans allow buyers to finance up to $35,000 for repairs.

Foreclosures often get scooped up by real estate investors who pay cash. But dont let that discourage you many lenders will help you find the right financing to buy a foreclosed home. Find a mortgage lender who understands your goals.

How Do I Get A Good Deal On A Foreclosed Home

When youre investing in real estatethe keyword there being investingyou make money by finding a good deal first, then selling at a higher price later. This means you want to buy something below market value.

One of the most important rules about buying foreclosed homes is that you must get a good deal. As an investor, you can generally consider a home to be a good deal if you can get it for 80% or less of market value minus the cost of repairs.

Even if youre taking the house as is, your offer should still account for the cost of repairs youll have to make after you buy it. You just need a home inspection and a good bid on repairs so you can apply the formula for getting a deal on the house:

80% of the appraised value minus the cost of repairs

For example, lets say you find a foreclosure listed at $125,000. You and your real estate agent agree this is a fair market value for the house in pristine condition. But its not in pristine condition and your contractor estimates repairs at $15,000.

Now do the math: 80% of $125,000 is $100,000, minus repairs of $15,000 equals $85,000. Thats the offer you make. Remember, the deal is made at the buy. That means you dont buy unless youre getting a deal. Youve got some room to negotiate, but dont go into debt to get the deal done.

Okay, so what if youre not an investor? Is it still a good idea to look at a foreclosed home as a first-time home buyer? Maybe.

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