Reasons To Buy A Foreclosed Home
Foreclosures are appealing to many buyers for several reasons, including:
- Lower prices: In most cases, buying a foreclosed home will cost you less than buying a comparable home on the market.
- Better return on investment: Because of the potential upfront savings, homeowners can invest extra funds into home improvements — which can produce a significant return when it’s time to sell.
- Fewer title issues : Bank-owned properties are thoroughly vetted ahead of time. The bank will clear the title for you, and you don’t have to worry about any issues the homeowner may have. That’s not the case with properties that are still technically in the homeowner’s possession or up for auction.
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.
Decide How Much You Can Afford
It doesn’t matter how much a lender says you can borrow if the amount is outside your comfort zone. Decide how much works within the confines of your monthly budget and stick to that price. You can use our monthly mortgage payment calculator to estimate payments for different types and sizes of mortgages.
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Determine A Fair Offer Price
You will likely have the chance to trim some costs from the final price when buying a foreclosed home at auction. But how much you save depends on the market, the house itself, and the negotiation process with the homeowner if its a preforeclosure. You definitely dont want to overpay for a home that needs a lot of work!
You may also want to talk to your agent about putting together a comparative market analysis that gives an idea of what similar homes in the area are worth so that youre offering something reasonable but not overbidding.
A CMA can estimate the value of specific properties by comparing them to recently sold properties in the immediate area. A CMA will look at the age of a home, the square footage, the number of bedrooms, location, and the propertys condition. That can be a big help with determining a fair offer price.
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.
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Pros And Cons Of Buying A Texas Foreclosure
The primary benefit of buying a foreclosed home at any stage is the discounted price you expect to get. Buyers also appreciate the increased inventory to choose from and the possibility of quickly gaining equity by renovating the property.
The major risks are damage to the property or title issues, but there are also some legal issues buyers should be wary of.
Close The Sale And Pick Up The Keys
If the bank approves your offer and the inspection doesn’t turn up any serious red flags, your sale will progress as normal. There is often a lot of paperwork and back-and-forth discussion between the bank and your agent, so patience is important. Your agent will keep you updated on the process. As soon as the transaction is complete, you will receive the keys and title to the house.
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How Fast Do Foreclosed Homes Sell
When a mortgage company forecloses on a property, it takes possession of the house and then sells it at auction or to a buyer. The foreclosure process often takes four months to several years to complete. However, this varies widely by state.
When a mortgage company takes back a house through foreclosure, it usually becomes part of the company’s real estate inventory to be sold at auction or to a bidder who makes an outright purchase. Some properties acquired through foreclosure may sit unsold for an extended period.
Is A Foreclosed Home Right For You
At the end of the day, its important to weigh the pros and cons, consider your goals as a homeowner or investor, and take a hard look at your finances and ability to improve the home before buying a home at auction. Though a foreclosed home may seem appealing on its face, there are a lot of nuances to buying these troubled properties and knowing the full scope of what youre getting into can help save time, cash, and serious hassle.
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Why Are Houses Foreclosed
Foreclosure is rarely a choice homeowners make willingly. In general, foreclosure only occurs when there are no other options. Foreclosures are most common due to job loss, serious medical conditions that prevent ongoing employment, serious maintenance issues with the home that a homeowner can’t afford to fix, divorce, or other drivers of consumer, educational, or medical debt.
No Room For Negotiation
When buying a home the traditional way, the seller may be willing to negotiate on the price. You submit an offer, the seller might counter, and in the end, you could end up paying less than the asking price.
Dealing with the bank is a more formal and corporate process than dealing with a seller, so expect limited flexibility, if any, when negotiating on the offer price, de Jong says. Banks are not likely to budge on the price, since they are mostly concerned with recouping the costs from their investment.
However, if youd like to test the waters, Boyce suggests you ask your agent to search for past sales by the bank to see whether the sale price is lower than the list price.
That will give you some insight into whether its worth submitting a lower offer, she says.
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Look Into Financing Options
Its harder to finance a fixer-upper than a move-in ready house.
If the property only needs cosmetic updates and is habitable, you can usually take out a conventional mortgage or government-backed mortgage with no extra hassles. But if the property isnt in habitable condition, youll need a special renovation loan.
Most homebuyers use one of two loan programs to buy fixer-uppers: Fannie Maes HomeStyle loan or FHAs 203K loan. These loan programs finance your repair costs in addition to the sale price, but youll still need to pay upfront for each phase of repairs before the lender reimburses you. Both programs come with strict rules, so research them carefully before pulling the trigger on a foreclosure.
Bear in mind that the better your credit, the better your odds of getting approved for a low-interest purchase-rehab loan. Pull your own to check it for errors, and start working on improving your credit score if needed.
Benefits Of Buying A Foreclosed Home
- Lower prices: One undeniable benefit is that foreclosed homes almost always cost less than other homes in the area or they are listed below market value. This is because theyre priced by the lender, who wants the home off of their books.
- Standard loan configurations: You might have to follow a slightly different bidding and buying process when you buy a foreclosure, but you still have a few loan options as long as its not a cash-only auction. As long as the home youre considering is in livable condition, you can get a conventional loan or a government-backed VA loan, FHA loan or USDA loan to buy it. Government-backed loans can make homeownership more affordable, but you if the property is damaged, the government may require work to be done.
What To Know Before Buying A Foreclosure
When a bank forecloses on a property, it wants to resell the property as soon as possible. This makes it a highly motivated seller with no personal attachment to the property. It will probably be willing to work with you on price, which is not always the case when a homeowner is selling their property. You can often get foreclosures for less than market value.
However, a foreclosure might not be the terrific bargain you think it is. Some may have fallen into disrepair and require a lot of expensive repairs.
You can find foreclosed homes in your area by doing a quick Google search. You could do it yourself, but consider hiring a real estate agent. They will look out for your best interests and might be able to save you a lot of time and hassle.
The Bottom Line: Consider Purchasing A Foreclosed Home
If youve dreamt of making the move to homeownership but your budget is tight, buying a foreclosed home might be the right choice for you. Its possible to find foreclosed homes that are being offered at below-market rates.
Again, dont rush into this decision. Its best to work with a real estate agent who can explain both the pros and cons of buying a foreclosed home in your community. And before you make an offer, be aware of the additional risk you might be taking on when you dip into the foreclosure market.
Already on the search for a foreclosed home to purchase? If youre not sure how to budget for a mortgage, use our mortgage calculator to estimate how much principal and interest youll pay each month.
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How To Reduce Risks When Buying A Foreclosed Home
Few things in life are without risk, but knowing what to look for can minimize the risk of buying a foreclosed home. Here’s how to buy a foreclosed home with less risk:
- Have the property inspected before making an offer. It’s an upfront expense that can save you thousands. Some foreclosure auctions don’t allow for walk-throughs or inspections, so weigh whether you’re willing to take that risk.
- Set a maximum price you’re willing to pay if you decide to take part in a foreclosure auction. And stick to that number. Emotions can run high when competing with others.
- Pay a real estate attorney to run a title search to ensure there are no liens or other title defects on the property.
- Budget for repairs. The costs will vary by property, but no matter what you think the final price tag will be, reduce your risk by padding that amount by 10% to 20%.
Learning how to buy a foreclosed home can be equal parts nerve-wracking and rewarding. Even if you’re buying the house you plan to live in for the rest of your life, look at the deal like a real estate investor would by keeping emotion at a minimum and making measured decisions. Your bank account will thank you.
Buying A Foreclosed Home: Pros And Cons
Buying a foreclosed home is a personal decision. It depends on a variety of factors, including your risk tolerance, the propertys potential reward, financing and your ability to move quickly. In many cases youre also benefiting from someone elses misfortune, which can be a deal-breaker for some people. Here are some pros and cons to consider.
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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.
Find A Real Estate Agent Who Knows Foreclosures
Buying a foreclosure is no ordinary home purchase, so youll want to work with an extraordinary agent. Find a real estate agent who has experience with foreclosure purchases. As youll learn below, everything from the timeline to what to expect from the seller is different with foreclosures, and the more experience your agent has with them, the better advice they can give along the way.
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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.
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How To Buy A Foreclosed Home In Missouri
Foreclosed homes can be appealing to house flippers, investors, and ordinary homebuyers looking for a bargain. Once a lender takes possession of a foreclosed home, they will seek to sell it quickly. They are less concerned about making a profit and simply want to break even on the amount they lost due to non-payment of the mortgage.
A homeowner who is having trouble making payments is sometimes willing to take what they can get, too, if it means avoiding foreclosure.
Along with a lower purchase price, however, buyers of foreclosures take on more risk and need more patience. Those willing to try it need to understand how to buy a foreclosed home. It is not exactly the same as buying any other house on the open market. States vary on some of their foreclosure procedures. In Missouri, a lot depends on at what stage the house is in the foreclosure process.
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How Do You Find Foreclosures In Texas
You can find foreclosures and pre-foreclosures on sites like Foreclosure.com, RealtyTrac, and Zillow, as well as on the MLS. Searching with foreclosure or pre-foreclosure filters will help you findthem on real estate websites.
Texas foreclosure auctions are also required by law to be publicly advertised for at least three weeks in the local newspaper.
Lender Files Notice Of Sale
Following the notice of default, the lender will eventually issue the notice of sale. This, too, is public record and is typically published in local newspapers. This information provides investors two complementary opportunities. First, for owners hesitant to sell during the notice of default period, this sale notice may provide additional incentive to sell prior to foreclosure. Second, if you dont want to spend time pulling reports at the county recorders office, these notices of sale still provide you an opportunity to make offers on homes before foreclosure.
NOTE: At Do Hard Money, we understand that approaching homeowners in these situations can intimidate new investors. As a result, weve developed a pre-foreclosure offer template letter. If youd like a copy of this letter, wed be happy to send it your way for free! Just text your email address to 435-294-0433.
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