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.
Properties May Have Repair Problems
Foreclosed properties can also be more affordable because the homes may have significant repair problems. Homes that have gone through the foreclosure process often will have had an unpaid mortgage for six months or more. In many cases, the property owners are aware that they will be losing the home and therefore do not have a financial incentive to keep up with maintenance. There are also situations in which a foreclosed homeowner will strip out appliances, cabinets, copper wires, and other parts of the value of the home. In the end, this can leave the new owner with significant repair needs, which can lead to a reduced purchase price.
Find A Foreclosed Home
One of the easiest ways to find foreclosed homes is to make friends with real estate agents who deal with foreclosed properties. Many times, an experienced real estate agent will be able to tell you about available properties before they go to auction. And many times, if you are a cash buyer, you can purchase the home from a bank or lender before other investors know about it. Barring that option, you can look online at foreclosure sites or other real estate market sites to see foreclosed homes and when they are being auctioned. You can also drive around the neighborhood and look for signs about upcoming public auctions.
You May Like: Can You File Bankruptcy For Student Loan Debt
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.
Get Preapproved For A Mortgage
Unless you buy a home at a foreclosure auction, youll probably get a mortgage to fund your home purchase. Once youve found an agent and you get started looking at homes, youll want to get preapproved for a loan. A preapproval lets you know how much you can get in a home loan. Choose a lender and apply for a mortgage preapproval to narrow your search.
Read Also: What Debts Are Not Covered By Bankruptcy
Be Prepared For Some Costly Repairs
You may be inheriting the space from tenants who couldn’t afford even the most basic repairs . Be prepared to shell out a significant sum just to make it livable. Specifically, in the case of Detroit’s incredible $1,000 auctions, winning bidders are responsible for bringing the home up to code within six months of purchase or risk forfeiting the property back to the city. If you can, peek through the windows to check for any necessary surface-level repairs.
Time The Process Correctly:
It is the pre, current, and post stages of a foreclosure that dictates who owns the property and if you can buy it.
Homeowners who receive default notices are those in the initial stages of a horrible foreclosure. A home thats underwater, which is in the initial stages, gets publicly priced below its mortgage value.
Auctions at county courthouses occur on a routine schedule to sell these properties. Once a property is deemed to be Real Estate Owned , however, you must then contact the lender to see its availability for purchase.
You May Like: How To Find Out What Debt You Owe
Make Sure You Have The Time For A Foreclosure
A flexible timeline is a huge help. The process of a buying a foreclosure is much less predictable than a regular home on the market. A regular seller is typically motivated to sell quickly because they want to move on with their lives. If you have a question about the property or want a response on your offer, you can expect to hear back soon. A mortgage lender isnt often so motivated. As a business, they have a bunch of priorities, and moving the sale of one foreclosure along is just one of them. A question or your offer can sit on someones desk for days or weeks as the person communicating with your real estate agent waits for an answer or approval from elsewhere in the organization.
If you are planning to live in the home, having a flexible living situation, like a month-to-month lease or staying with family, can give you the time and space you need to wait out the process.
Finding Cheap Houses: Special Programs
There are two government-sponsored programs that could help you find a cheap house to buy if you meet their requirements.
The U.S. Department of Housing and Urban Development Good Neighbor Next Door program sells single-family homes in revitalization areas at a 50% discount from the list price. You must be a law enforcement officer, a pre-K-through-12th-grade teacher, a firefighter, or an emergency medical technician to qualify for the program. Homes can be found on your states listing and are only available for purchase for seven days.
If youre approved to buy a Good Neighbor Next Door home, you must sign a second mortgage note for the discount amount and occupy the house for a minimum of three years. After three years, the second mortgage note will be discharged.
HUD Dollar Homes encourages homeownership among low-income families by offering homes for sale for $1. These are REO homes that havent sold in the past six months and have a current market value of $25,000 or less. You must meet income requirements and apply on your states website, which is also where youll find available homes.
Taking advantage of government programs is one of Rosins favorite ways to bootstrap a new investor into a house. Shell advise them to buy and occupy the home for the minimum required period while saving up money for their next investment, then move out and rent as soon as they can.
Also Check: How Long Chapter 7 Bankruptcy On Credit Report
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.
If Youre Searching For Foreclosures For Sale For Your Next Home Or To Flip For A Profit These Websites Will Guide You To Foreclosures To Buy
You may remember that foreclosures were a big part of the Great Recession. As the economy cratered, foreclosure filings soared. In the first half of 2010 alone, 1.65 million U.S. homes spun into foreclosure, according to data from ATTOM Data Solutions, a property database provider.
10 years later, will the COVID-19 pandemic lead to a rash of foreclosures? That could spell a lot of hardship, but also an opportunity for investors to flip homes for profit as more American workers switch to full-time remote work, often in less-expensive cities and towns.
Ongoing efforts to ease the pandemic’s economic impact including the CARES Act — have slowed the foreclosure process, particularly for properties where mortgages were federally backed. But that stay doesn’t apply to lenders or servicers of loans not backed by the government .
Buying and flipping foreclosed homes might be a path to consider if you are building a home-selling business.It follows the maxim of buy low, sell high: buy a foreclosed home on the cheap, make the needed improvements, and sell at or above the market value.
Nearly 11,700 American properties received a foreclosure filing default notices, bank repossessions or scheduled auctions in October, up 20% from September. The states with the highest foreclosure rates in October were South Carolina, Nebraska, Alabama, Louisiana, and Florida, according to ATTOM Data Solutions.
Find An Experienced Foreclosure Agent
Some pitfalls come with foreclosed homes, so youll want to work with a realtor or foreclosure specialist who has experience navigating the process and knows the local market. If youre interested in an REO property, youll likely work directly with the banks broker in many cases.
An experienced agent can help you determine when a foreclosed home is offered at a bargain price, and when its not worth the risk involved. Every state has its own set of laws and regulations concerning foreclosures, and an expert can help you understand them to avoid hefty costs down the line.
The cost of closing, repairs, and property taxes can turn a bargain house into a money pit. The bank may also hold you financially responsible for any property debt that wasnt paid by the previous owner. Working with an expert can help you understand what your financial obligations are beyond the mortgage.
It doesnt cost you a lot to use the right realtor, but it could cost you a lot to use the wrong one, Enriquez says.
Lastly, know that the previous owner might have the right to redeem a foreclosed property. Many states in the U.S. give homeowners this protection, which allows them to reclaim their foreclosed home as long as they can repay their debt within a certain period of time.
But it doesnt happen often. Many people whove gone through foreclosure arent typically able to come up with money quickly to repay the outstanding mortgage balance and any extra costs incurred during the process.
Are All Mortgages Assumable
No, not at all. Conventional mortgages, which are mortgages that can be sold in the secondary mortgage marketplace, are generally not assumable when they have fixed terms. Conventional loans with adjustable-rate mortgages are sometimes assumable if the fixed period is over. However, government-backed mortgages, such as FHA, VA, and USDA mortgages are typically assumable.
Note that it is often easier to assume a loan when you inherit a property with a mortgage or when you take on the full mortgage after a divorce.
Be Prepared To Make An As
Most foreclosed homes are sold as-is. That means no matter what an inspector turns up, its unlikely to be fixed. But knowledge helps. First, make an offer that gives you room to deal with the unexpected, and try to include a home inspection contingency, which allows you to walk away from the deal if a major issue is found.
If your offer is accepted, take advantage of your contingency period to learn as much as you can about the property. Each lender will have their own stipulations about the contingency period, but if you can, get as many expert opinions on the place as you can. These pros might include a home inspector, a structural engineer, a pest inspector, or a hazardous materials inspector. Depending on what you learn, you may want to walk away, or you may try to negotiate for a lower price.
How To Buy A Foreclosed Home In 5 Steps
The process for buying a foreclosed home can be summed up in an easy five-step process, as outlined below. This is the same process as buying a home that hasnt been foreclosed on with a few small changes. For one, youll likely be working directly with a bank or mortgage lender that now owns the property and they could be much less responsive than an individual selling their home. Also, the way you find foreclosed homes can be different than your traditional housing search.
The five steps for buying a foreclosed home are:
You May Like: How Long Does Bankruptcy Stay On Your Credit File
Know The Different Types Of Foreclosure
First and foremost, before buying a foreclosed house you should understand the foreclosure process.
When a homeowner defaults, lenders must wait a minimum of 120 days before even beginning the foreclosure process. That gives the borrower plenty of time to negotiate a payment plan or short sale, sell the property, or use another strategy to prevent foreclosure.
After 120 days, lenders can file in court to foreclose and advertise the foreclosure auction. The auction cant take place less than 60 days after the 120 day waiting period ends, for a bare minimum of around six months between when a borrower defaults and when their home goes to auction. In reality it usually takes longer, sometimes as long as a year.
At the public auction, most mortgage lenders start the bidding at the total amount owed, including legal fees and back payments. Because thats usually near or over the homes market value especially since bidders cant enter the property to inspect its condition most homes dont sell at foreclosure auction. The lender then takes ownership, which takes more months of legal filings.
If the homeowner remains in the property after the lender has retaken legal ownership, the lender must then file for eviction, which takes months longer. Only after the property has been vacated do lenders list it for sale on the multiple listing service .
Which leaves bank-owned properties post-foreclosure, also called real estate owned or REO properties.
Find The Home You Want To Buy
There are several ways to find foreclosures.
You can work with an agent, check out websites that list foreclosures and bank-owned properties, or keep track of local auctions. You may find a list at your local courthouse and some government agencies. Large banks, such as Wells Fargo and Bank of America, also have lists of foreclosure properties. A few of the larger online auctions include auction.com, foreclosure.com, and Bank Foreclosures Sale.
- The U.S. Department of Housing and Urban Development maintains a list of its foreclosure homes.
- Through its HomePath website, you can find foreclosure properties from the Federal National Mortgage Association .
Read Also: How Much Is It To File Bankruptcy
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.
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.
Recommended Reading: How To File For Bankruptcy In Houston Texas
Prepare Financials & Documents Required
Using a real estate company or buying rbc foreclosures ontario both necessitate an approval process, as you would find with a regular mortgage. To up your chances of a smoother transaction, you can start by working towards getting approved:
- Review and find ways to improve your credit score
- Come up with a significant down payment
- Look for ways to increase income
- Pay off debt
- Keep your finances in order
These are some steps that can up the ante for you to successfully buy bank repo houses for sale sudbury ontario.