Bidding On A Home Thats Getting Foreclosed On
There are three ways to bid on a home thats getting foreclosed on:
Make Offers On Homes That Fit Your Needs And Price Point
The way you approach this step depends on the type of foreclosure home you want to purchase. If you plan to buy one that is real estate owned or government owned, you or your agent have to make an offer to the real estate agent working with the bank to sell the home, or to the government agency itself.
If you want to purchase a foreclosure home that is about to go to auction, you or your agent have to make an offer to the person in charge of the auction. In pre-foreclosures, you or your agent have to make an offer to the homeowner.
If you’re using a real estate agent, work with them to establish a contingency plan as part of the offer to make sure you can have the home inspected before your purchase is finalized.
Bid Higher If Other Foreclosures Are Selling Quickly
When a foreclosure comes on the market there is frequently high competition, so be prepared to bid fast and high. Theres no exact formula on what the banks bottom line will be, so if foreclosed homes in your area are selling quickly, its important to work with your agent to craft a strong offer, backed up by your preapproval letter if obtaining a mortgage. In many instances, foreclosures are already discounted, so an offer thats too low might be a non-starter for the bank.
Keep in mind that the type of house and location matter, and some homes might sell faster than others. In competitive markets, you might need to offer asking price and keep contingencies to a minimum.
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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.
How To Find Pre
This will take some legwork and persistence. Remember you are not the only real estate investor out there looking to snatch up these distressed properties being sold by highly motivated sellers. You will have to do some research, build a solid network and develop a marketing outreach program.
You may start by contacting local banks and mortgage lenders. Any properties that have already been seized and/or have been put up for auction should be listed publicly. Still, you may be able to find some off-market deals. You can also ask about homes currently in pre-foreclosure or short sale situations. Lenders are generally looking to avoid foreclosure situations. They are messy and they typically end up losing money. Building connections with banks and mortgage lenders can lead you to some good buying opportunities. You can also check county sheriff departments and city resources when it comes to tax defaults and upcoming seized property auctions.
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How Do You Buy A Foreclosed Home
The two common ways of buying a foreclosed home are through a real estate agent or through a public auction.
There are many factors to consider when buying a foreclosed home compared to a traditional home purchase. REO properties are an affordable housing option, but there are also more things to watch for with this type of home purchase. Use this guide to better understand the steps involved in buying a foreclosed home and to increase your likelihood of success in finding one that is right for you.
The Process Can Be Slow
Buying a foreclosure home requires a lot more paperwork than a typical sale, and as a result, the process can take a long time. If you need to move in a short time frame, buying this type of property will not be a realistic option for you.
Short sales tend to move incredibly slowly, as they involve communicating with a property’s current owner and lender. The longer either of these parties takes to respond, the farther your closing date gets pushed back. You may also need to wait longer if the home you’re buying has a redemption period.
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The Bottom Line: Is Buying A Foreclosed Home Right For You
Buying a foreclosure can be a unique opportunity for homebuyers looking to pay lower prices or below market value or for complete home restoration projects. Keep in mind that many foreclosed homes could have severe damage and structural issues, and are usually sold as-is.
Get in contact with an experienced real estate agent if you want to take a risk on a foreclosure. Your real estate agent will help guide you through the foreclosure process, because most lenders dont sell to individual buyers.
Once you find a home youre interested in, get an appraisal and property inspection completed. Youll also need to secure funding with a mortgage preapproval. Follow up with your lender and agent to finalize the sale once the results of your inspection look acceptable.
If youre ready to get a mortgage approval, get started online!
Find a local pro.
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.
|
$15,000 |
$85,000 |
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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Get The Most Up To Date Title Information
A title search is always recommended for any real estate transaction. A title company will check the property for liens as well as verify that the deed to the home is correct. A title search is especially important when buying an REO property due to the unique transfer of ownership at foreclosure. There may be liens on the title that may not be uncovered until the closing process begins. Again, a real estate professional who is experienced in foreclosed homes can be a valuable resource in guiding you through this process.
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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No Chance To Inspect The Property
By far, the biggest drawback of foreclosed properties is that you cant do a walkthrough before buying them. Foreclosed houses are sold as is, and you dont get a chance to have a look at them. All in all, this is the biggest risk of purchasing one, as you have no way of knowing which problems it has. The only thing you have to go off of is the price, and that method is still just guessing. The house could be in good condition, with only cosmetic repairs needed, or it could have several issues which make it unlivable. Because of this, we recommend that you dont buy a foreclosed house if you plan on moving in immediately. And when it comes to moving, if youre moving over a long-distance you should consider how to save money on this. Moving on a budget isnt always a bad idea, after all.
Attend The Auction And Bid
Check-in at least one hour before the auctions start. Get an Auction Bidder Card and raise it when the auctioneer announces a price that youre prepared to accept as your winning bid.
If you win the auction, your payment is due immediately or the following business day . Once youve paid in full, youll complete a certificate of sale or an execution of sale receipt, deed upon sale and IRS Form 8300, subject to state-specific laws.
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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.
The Basics Of Foreclosures In New York
A foreclosed property has gone through a process where the lending institution has tried to recover some of the outstanding funds from the property owner who has defaulted on their loan. The lender will then usually sell the property at a foreclosure auction for a lower price than it is worth, to get it off their books as soon as possible.
Under federal law, the loan provider normally has to wait 120 days before officially initiating a foreclosure. This gives the property owner sufficient time to explore alternative options before they essentially give up the ownership rights of the property.
For real estate investors, foreclosures often present good investment potential, because these properties are often sold below their market value. This is mainly because lenders are not in the business of property management and would rather sell a property that has been defaulted on, in order to avoid paying ongoing maintenance expenses.
In the state of New York, lenders and banks need to file lawsuits in order to proceed with the foreclosure process. While much of the buying process for a foreclosed home is the same as any other property purchase, property investors may find the purchase process to be more nuanced in certain ways.
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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.
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.
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Why You Should Not Buy Foreclosed Houses
Here are a few drawbacks of buying foreclosed houses:
- Increased maintenance issues: When you acquire a foreclosed house, you are in charge of resolving any issues the property may have. This is because when a homeowner anticipates losing their house to foreclosure, they may lack the motivation to keep it in good shape. If anything fails, the homeowner might not pay to replace it, which might cause the issue to worsen over time.
- Squatters rights: Because some foreclosed houses are unoccupied for a long time, they may get occupied by squatters and so, even though the occupant in question have no legal right to the property, you must take legal steps to remove them if you purchase a property with squatters already residing in it. It can take months and set you back hundreds of dollars in legal expenses.
- As-is sales: If you dont have a sizable sum of money set up for repairs, you shouldnt purchase a foreclosed property. This is because the primary goal of the lender is to recover their money as fast as possible, which nearly always necessitates an as-is selling.
- Slow process: The buyer may have to deal with a ton of paperwork as a result of any or all of these issues. In order to prepare for the closing on a foreclosure, several more documents typically need to be completed, which may take longer than the buyer would want.
- There is no assurance or disclosure of the condition of a foreclosed property, hence, there are hidden costs.
How Does A Foreclosure Auction Work
If youre an auction newbie, attend a few with the intention of learning not buying. Some are small trustee auctions that dont take long others are held by large auction firms and include multiple properties. Seeing how the auction works will prepare you to jump in once youve found a property you like. Once that happens, use Zillows Foreclosure Estimate to determine what the home will likely sell for.
When youve found a property you want to bid on, contact the auctioneer or trustee to determine how much money you need to bring to the auction the amount varies from state to state. Many auctions require bidders to bring a certified check for $5,000 made out to the auction company to show legitimate intent. In some cases, a percentage of the winning bid is required on the day of the sale. Make sure you research auction requirements in your state before bidding on a foreclosure.
And remember that your auction bid is absolute. Read more about foreclosure auctions, including tips from veteran auction-goers.
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