Purchasing A Foreclosed Home
If buying from a bank, youll need to sharpen your bargaining skills and start with a lowball offer on the property you want.
Banks that have accumulated sizable inventories of foreclosed properties will be more inclined to negotiate on price. The longer the bank has held the property, the greater the odds that it will seriously consider low offers.
You could make an initial bid at a price thats at least 20% below the current market price, or even more if the property is located in an area with a high incidence of foreclosures.
If you can pay for the property and any necessary renovations in cash, youre in an enviable position. Thats why some buyers decide to team up with outside investors who can help them out on the front end and share any profits when the home goes on the selling block once again.
In fact, cash deals represent a sizable portion of REO sales.
Drawbacks Of Buying A Foreclosed Home
Buying a foreclosed home is riskier than buying a home thats owner-occupied. Below are some of the drawbacks to buying a foreclosed property.
- Increased maintenance concerns: Some homeowners have no incentive to maintain the homes condition when they know theyre going to lose their property to foreclosure. If something breaks, the homeowner wont spend money to fix it, and the problem could get worse over time. Youre responsible for fixing whatever problems the home may have when you buy a foreclosed home.
- As-is sales: The lenders main concern is recouping their money as quickly as possible, which means an as-is sale in almost every instance. You shouldnt buy a foreclosed home if you dont have a significant amount of cash to invest in repairs.
- Squatters rights: A home might be legally foreclosed, but it doesnt mean that no one is living on the property. Many foreclosed homes sit unoccupied for months or years at a time, which could attract squatters. If you buy a property with a squatter living in it, you need to legally evict them even if the person or people in question have no claim to the home. This can take months and cost thousands of dollars in attorney fees.
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.
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Should Buyers Seek Out Foreclosures
Foreclosures have long been looked at by buyers as an opportunity to get a great deal on a decent housebut its not that simple. Foreclosures are not like regular homes that have been put on the market, and there are plenty of potential pitfalls that buyers should be aware of.
If the previous owner was unable to pay the mortgage, other structural issues with the home may have been neglected as well.
A foreclosed home may have significant structural damage that would be expensive to repair, says Joshua Haley, founder of Moving Astute in New York. As a result, homebuyers must do their homework before buying a foreclosure property. They should research the property thoroughly and get a professional inspection to ensure that they are aware of any potential issues.
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.
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No Seller Disclosures And Competition
Since no one from the bank has ever lived in the house, they are unlikely to have any knowledge of existing problems with the property. You will have to uncover everything yourself during the home inspection, by asking neighbors, or through experience after you become the homeowner.
Because foreclosures can be great deals, they are attractive to investors looking to flip properties or use them as rentals. Since investors can make all-cash offers with fewer or no contingencies and fast closings, their offers may be more attractive to the bank than those from would-be owner-occupants.
A Suitcase Full Of Money
Michael Keating Jr. has fielded daily calls and texts from investors wanting to buy his parents rental house on Courtyard Place, which he called home for at least a decade as a child.
At one time, his parents owned as many as three Courtyard Place houses and over the years sold them to investors who offered a fair price. But todays investors, Keating said, waste his time with lowball offers.
Im assuming their tactic works because theyre a big company, he said. Its like fishing. You throw enough lines out, eventually youre gonna catch one.
Homebuyers across the region say investor tactics have curbed their options.
Jessica Goddard and her husband, John Bowers, looked for months before they bought their first house this summer. They lost count of the number of times they were outbid for a house, but they remember one where an investor offered all cash on a $130,000 house on Cherokee Street in south St. Louis.
Theres no inspection, no criteria, Bowers said. Theres just like a suitcase full of money.
VineBrook Homes, FirstKey and Main Street Renewal have headquarters far from St. Louis, but they have boots on the ground: real estate agents charged with finding properties and employees to manage them.
The companies provide the agents with financing statements that say how much to spend and a shopping list of what to look for such as two-bedroom houses, with no fewer than 850 square feet, in specific areas. They make no emotional purchases.
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Problems With The Property
The most important thing to keep in mind before deciding to shop in the foreclosure market is that these properties are given up by owners who can’t afford their mortgage payments anymore. In these cases, the house may have been poorly maintainedafter all, if the owner can’t make the payments, they are likely falling behind on paying for regular upkeep.
Also, some people forced into foreclosure are embittered by their situation and take out their frustrations on their homes before the bank repossesses them. This often involves removing appliances and fixtures and sometimes even outright vandalism. After the occupants leave, foreclosures sit abandoned, often inviting criminal activity.
It’s The Little Things
Big-ticket items like new windows generally dont pay off when flipping a foreclosure home, but dont underestimate the effect of inexpensive cosmetic improvements like new doorknobs, switch plates, toilet seats, ceiling fans, faucets and cabinet pulls. Tip: Make sure all your projects are 100 percent finished when the For Sale sign goes up. According to Charles McMillan , president of the National Association of Realtors, a purchaser will subconsciously subtract almost double the cost of an undone project when they make an offer.
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A Note About Purchasing 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 with a home up for short sale. 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.
Foreclosure Rates In Us Counties 2008
The foreclosure crisis has distinct epicenters in the U.S. The foreclosure rate equals or exceeds the national rate in fewer than 10% of the nations counties: 270 of 3,141 counties had a foreclosure rate of 1.8% or higher in 2008. The vast majority of those counties207 of 270are located in a handful of states . California and its neighbors to the east and the manufacturing belt comprise two hot spots. Other states with high foreclosure rates are Florida, Georgia, Virginia and Colorado.
Florida and California have the most severe problem with foreclosures. The foreclosure rate in 2008 exceeded 5% in 12 counties in California and 10 in Florida . Those counties accounted for the majority of the nations 33 counties with a foreclosure rate of 5% or more. The highest foreclosure rate in the U.S. was 12.0% in Lee County, Fla.
In contrast, most of the nations counties experienced few foreclosures in 2008. In 2,164 counties, the foreclosure rate was 0.5% or less . That total includes 382 counties in which no properties entered into foreclosure proceedings in 2008.
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Paint + Flooring = Dramatic Makeover
Real estate experts always advise giving walls and trim a fresh coat of paint , but dont forget whats underfoot. Old hardwood flooring hidden under outdated carpet and laminate is usually worth refinishing if youre replacing flooring, opt for wall-to-wall beige carpeting, hardwood laminate or solid hardwood, depending on the neighborhood and your budget. Tip: A light gray coat of paint in an unfinished basement makes the area look clean, bright — and more valuable.
There’s More To The Numbers Than Seen At First Glance
A 7x jump sounds massive, but even a small uptick in foreclosures would have been a notable increase when compared to recent levels. Moratorium protections that prohibited lenders from initiating foreclosures during the pandemic in 2020 and 2021 resulted in the lowest number of foreclosure filings since this data has been tracked on a national level.
Today’s foreclosure starts, while much higher than recent past, are still below pre-pandemic levels — by a lot. In 2021, there were a total of 151,153 foreclosure filings for the entire year, which was 69% less than pre-pandemic levels in 2019. For the month of January, there were 56,251 foreclosures filed in 2019, 58% more than the number filed in January 2022.
Foreclosure filings are continuing to rise month over month, with February 2022 seeing 25,833 new foreclosures, an 11% increase from January 2022, which is welcome news for distressed real estate investors. But the numbers aren’t necessarily a red flag for the housing market.
Image source: Getty Images.
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Determine How Much Home You Can Afford
Budgeting matters when buying a foreclosed home. Yes, you might be able to nab your new home at a lower price tag. But foreclosed homes arent free. And despite what you might have heard, you cant buy a foreclosed property for $1 either.
Youll need to craft a household budget listing your monthly income and expenses to determine how much of a mortgage payment you can afford each month.
If you dont do this, you might purchase a home you cant afford even if youre looking for a foreclosure. By purchasing a home thats out of your budget, youll struggle to make your own mortgage payment each month.
As with any home purchase, its important to predetermine your debt-to-income ratio. As the name suggests, this ratio analyzes how much of your gross monthly income your monthly expenses will consume.
Most lenders want your monthly debts to take up no more than 43% of your gross monthly income. If your debt-to-income ratio is higher than that, youll struggle to qualify for a home loan.
Be especially careful when buying a foreclosed home. You might be tempted to buy a foreclosure with a price tag thats at the very top of your budget.
The problem with this is that the foreclosed home might require expensive repairs. If youve purchased a home at the top of your budget, you might not have enough money to afford those needed repairs.
Buying A Foreclosed Home: Where To Search How To Buy And What To Watch Out For
The deals are real, but there are risks involved.
Luke Daugherty
Luke Daugherty is a freelance writer, editor and former operations manager. His work covers operations, marketing, sustainable business and personal finance, as well as many of his personal passions, including coffee, music and social issues.
If you’re searching for a house to buy — and you’re looking for a deal — a foreclosure may be an enticing option. Foreclosed properties, which have been taken back by a lender after the homeowners defaulted on their loan, usually sell for significantly less than similar homes on the traditional market.
The lower price tag has a few strings attached, though. Buying any house can be complicated — and a foreclosed house especially so, with its own unique set of risks and challenges. Learn more about how to buy a foreclosed home to decide if it’s a good option for you.
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How To Back Out Of Buying A Foreclosed Home
Your ability to back out of the purchase may depend on how far into the purchasing process you are. Generally, youre able to back out of buying real estate if you havent signed the purchase and/or financing contract that would put the title in your name. If you do back out, you could lose any earnest money you originally put down toward your purchase offer.
Search For Foreclosed Homes
An experienced agent should have no trouble helping you find foreclosure listings. However, if you’re eager to do your own research, check out these resources:
- HUD Foreclosures and HomeSales.gov point to various agencies with government-owned foreclosure listings.
- HomePath.com is Fannie Mae’s foreclosure listings service, and HomeSteps.com is Freddie Mac’s. Both allow you to search by address, ZIP code or MLS number.
- Zillow and Realtor.com have search portals specifically for finding foreclosed homes.
- Auction.com is a great resource for auction listings, but it is primarily designed for investors.
- Foreclosure.com is a helpful resource for finding preforeclosures before they hit the market.
- Banks and lenders may have their own sites with foreclosure listings.
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Drive By The Property If Possible
This will let you see the homes conditionfrom the outside. Homes in the foreclosure process are usually occupied by the owner whos being foreclosed upon or a renter. Do not trespass or disturb the occupant! Doing so is a criminal offense.
When you bid on a foreclosure, youre bidding on the property as-is. You wont know what condition youll find inside once you take possession. Extra, unexpected repairs could cost you thousands of dollars, so take that into account when figuring out how much you can comfortably bid. Theres a saying among investors thats a pretty good rule of thumb: How it looks on the outside is what its going to look like on the inside. In other words, an unkempt exterior indicates an unkempt interior, while a home with great curb appeal will probably look similar inside!
The Impact Of Foreclosures On The Housing Market
A record number of mortgage loans are either in default or in danger of being defaulted upon. Many of the properties that back these loans will end up going through the foreclosure process. A growing body of research shows that foreclosed homes sell at a discount and that foreclosures have a negative impact on the value of other homes that are nearby. The effect on nearby property values happens for two different reasons, but my recent work suggests that one or the other predominates depending on certain characteristics of the neighborhood where the foreclosures are occurring. This finding implies that different approaches might be required to mitigate the negative effects of foreclosures in different neighborhoods.
About 2 million homes are somewhere in the midst of the foreclosure process, according to RealtyTrac. Most of these have yet to go on the auction block, and nearly a fourth are owned by the lenders who provided or purchased the homes mortgages. More foreclosures are comingaccording to the Mortgage Bankers Association, the number of mortgages in foreclosure or more than 90 days delinquent is at a record high of about 4.2 million.
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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.
What Does It Mean For A Home To Be Foreclosed On
When a homeowner fails to make mortgage payments, lenders have the option to seize a home, a process known as foreclosure. Much like a car loan is tied to the collateral, the vehicle, your mortgage is tied to your property.
If you fail to make payments, your lender has the right to seize the collateral your home. In some states, foreclosure is a lengthy legal process that can take years. In others, it can take less than a few months and bypass the court system completely.
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Get An Appraisal And Inspection
Inspections and appraisals are both crucial when it comes to buying a foreclosure. An appraisal is a lender requirement that lets you know how much money a property is worth. Lenders require appraisals before they offer home loans because they need to know that they arent lending you too much money.
A home inspection is a more in-depth look at a property. An expert will walk through the home and write down everything that needs to be replaced or repaired. Because foreclosures usually have more damage than homes for sale by owner, you should insist on an inspection before buying a foreclosed home.
Sometimes, you dont get the chance to order a home inspection or appraisal before you buy. You should only consider buying these types of foreclosed properties if youre advanced at home repair.
