How Buy Foreclosed Homes

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.

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.

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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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.

Make A Competitive Offer

Work with your agent to get an idea of comparable home prices so you can make a smart offer that fits your budget. After all, in a live auction situation, you definitely want to know your limit! But even if you’re buying a home that’s been bank-owned for some time, you’ll want to be strategic.

In a hot real estate market, you may need to offer the full asking price. But even in a more balanced market, a low-ball offer may not fly. The bank may already be asking what it considers to be fair market value and be unwilling to go lower. With an auction site, you may need to meet a reserve price for your offer to be considered.

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Get An Inspection And Appraisal

Because the property may not have been well taken care of, its strongly recommended that you get a home inspection. A professional inspector will flag any problems with the homes structure or major appliance systems. If there are large issues thatd be expensive to fix, youll have to weigh the cost of repairs with the savings youre getting from purchasing a foreclosed home. A home appraisal will provide you and your future lender with a professional estimate of the homes value.

How To Find Foreclosed Homes

Think back to the collapse of the housing market of a decade ago, when borrowers defaulted on subprime mortgages in high numbers, and millions of homes went into foreclosure as a result. Foreclosures and short sales flooded the market.

But those days are over, at least for now. Charlie says theres tough competition for what few properties remain on the foreclosure market nowadays. And youll need cash, or you risk losing to investors who can come up with the funds quicker.

Pre-COVID, the economy was very strong, and you were lucky to find a short sale or a bank-owned foreclosure, Charlie says. Not saying they didnt exist, they did, but they were harder to come by.

Finding foreclosures may be a little more challenging in strong real estate markets, but its possible. You can start by sifting websites that now specialize in homes and properties in foreclosure, like Fannie Maes HomePath.com. Some banks, such as Bank of America, have online databases that can also help you search for a foreclosed home.

Leveraging a real estate agent is going to be your best bet for finding foreclosed homes. A real estate agent will be able to find foreclosure property listings for you on the Multiple Listing Service a database of real estate listings that consumers cant access directly.

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What Are The Different Types Of Foreclosed Homes

There are essentially two categories of foreclosed homes: bank-owned homes and real estate-owned properties. Both bank-owned and REO homes are under the ownership of the lender, which, in many instances, is a bank. The only distinction is what stage the foreclosure is in.

Bank-owned homes are in the thick of foreclosure, meaning the homeowner has stopped making payments. In turn, the lender has started the legal process to remove him or her from the home. Foreclosed homes are bank-owned properties that eventually go to auction, where the bank tries to recoup the money for the property.

If the home doesnt sell, its still bank-owned, but it is now known as an REO home. REO properties have already gone through the auction process and remain unsold. The bank or lender retains ownership and tries to sell these properties, oftentimes through REO real estate agents.

Q: How Is A Property Deed Conveyed With A Home Foreclosure

A: A deed is a written document that transfers property title from one party to another. Some deeds protect the buyer against any liens or claims on the property, while others warranty as little as possible. Find out ahead of time what type of property deed is being used to convey title to the foreclosure home youre bidding on.

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Risks And Rewards Of Buying A Foreclosed Home

The amount of risk and potential reward of buying a foreclosed home can vary depending on which part of the foreclosure process the home is in.

First, lets cover some of the risks of investing in a foreclosed home:

• Theres a lot of competition to buy a foreclosure. Real estate investors, for instance, often bid cash for a foreclosed home to operate as an income property with no contingencies and no questions asked.
• The condition of a foreclosure home isnt disclosed or guaranteed. Unlike buying a home listed on the MLS by a real estate agent, the bank isnt required to disclose anything about the property to a buyer. Thats why its important to learn as much as possible about the house before you bid.
• Buying a foreclosed home doesnt always make sense. Just because a home is being sold at a foreclosure auction doesnt necessarily mean its a good deal. Some foreclosure homes have been completely trashed by the previous owner and require major repairs like new roofs or heating and air conditioning systems.

However, theres an upside to everything. Some of the rewards of buying a foreclosed home include:

Order A Home Inspection

Once your offer is approved, its time to get the home inspected.

A home inspection isnt legally required, but with a foreclosure, skipping this step would be reckless.

Youll want to know if there are any serious issues with the home before closing. A home inspector will assess the main structural parts, systems and appliances in the home, including:

• Basic plumbing.

You should expect to have to do some repairs. But by adding a contingency to your offer, youll be able to back out of the deal if the inspection reveals serious problems.

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What Are The Advantages Of Buying A Foreclosed Home

Like we mentioned, foreclosures are usually priced lower than other homes on the market, so you can get some killer deals if you know how to buy a foreclosed home thats right for you.

And if youre an investor whos willing to put a little sweat equity into the project, you could make a pretty sweet return on investment.

Another benefit is less competition from traditional home buyers, which gives you the ability to negotiate a little more than normal in a hot market like this one.

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!

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Confirm All Auction Details Even On The Day Of The Auction

Its very common for foreclosure auctions to be postponed or even canceled. Sometimes an auction is canceled because the borrower comes up with the money to pay the lender the amount they owed, obtains a loan modification or sells the property as a short sale. Auctions might be postponed for a myriad of reasons for example, the bank or lender might not be able to compile the proper documentation in time, or the owner might request more time to complete a short sale.

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.

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Who Should Buy A Foreclosed Home

People who are willing to do significant research before making an offer, and who are willing to deal with lengthy delays and onerous paperwork, could find this a good strategy.

It very much helps to be able to pay significant cash on short notice for repairs, overdue taxes, and liens.

Eligibility for one of the federal financing programs such as a 203 loan, HomePath ReadyBuyer, or a HomeSteps mortgage, is a plus. These programs were created to help you buy a home.

Failing that, an all-cash offer, if possible, can give you a leg up.

Figure Out Your Financing

If you are paying cash, you can buy a house at auction. Otherwise, with a mortgage, youll probably be limited to a preforeclosure or an REO sale. But before considering either path, youll want to take steps to get preapproved for a mortgage loan. Once you have that in your pocket, youll be more likely to be taken seriously by a seller.

Be aware that many lenders wont offer to fund properties in foreclosure. The main reason is the house may not pass an inspection, says Andy Kolodgie, founder of The House Guys operating in Washington DC. A good option to finance foreclosed properties is with 203 loans from the Federal Housing Administration.

This option helps buyers finance a foreclosed property plus any required repairs into a single mortgage. To cover basic repairs, buyers can borrow up to $35,000 on top of the mortgage amount, explains Kolodgie. That means one loan and one closing. Your down payment will be based on the total value of the loan, and because repair costs are included in the loan amount, youll want to budget for higher monthly payments.

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Get A Home Inspection

Once again, keep in mind that youre buying a foreclosed home as-is. This means no one on the selling side is going to pay for any needed repairs. These repairs are your responsibility.

Because of that, its very important that you inspect the property as part of your offer process. And if the home inspection uncovers too many problems or problems that cost too much to fix, you might want to pass on buying the home.

Banks or government agencies will usually allow for an inspection contingency as part of an offer. This means you have the opportunity to order a home inspection after your offer is accepted but before the sale closes. Your home inspector will tour the residence looking for everything from leaks in the roof to evidence of a shifting foundation.

After the inspection, youll receive a written report detailing the inspectors findings. Youre able to walk away from the sale if there are too many problems. Foreclosed homes tend to offer little to no room for negotiation no matter what the inspection reveals.

Again, expect to spend more money on repairs for a foreclosed home. To get a better sense for the houses current state, find out how long its been unoccupied and determine if the previous homeowner performed routine maintenance on the home.

Its also a good idea to check with your local building department to find out if there are any open building permits that could present issues post-closing.

Find Foreclosures For Sale

Although your real estate agent will likely be able to help you search for foreclosures, you may want to investigate for yourself as well. The internet has made it much easier than it used to be to find foreclosures in your area and in other parts of the U.S. There are now multiple different areas of the web where you can search. Here are three we especially recommend:

• Rocket Homes: This online repository for real estate listings will even tell you what type of foreclosure you are dealing with.
• HUD: This official government website lists foreclosed homes. There will be a real estate agent listed whom your own agent can contact.
• Fannie Mae HomePath®: Here you will be able to search for foreclosure listings by address, ZIP code or MLS number.
• Freddie Mac HomeSteps®: This is Freddie Macs answer to the Fannie Mae foreclosure site, with very similar functionality.

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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.