What Are The Risks Of Buying A Foreclosed Home
Imagine youre the proud owner of a foreclosure. You got an awesome deal, youve got a schedule for all the repairs you need to make, and you know how much theyre going to cost. Youre all set to move in , right?
Pump the brakes! Some states have whats called right of redemption, which means a homeowner who has been foreclosed on has a period of time to redeem, or buy back, the property. That means that if you worked hard to buy our example property for $85,000, the previous owner has the right to buy it back from you for $85,000 plus some interest.
The period of time varies by state and can last up to one year. You dont want to fix up someones house for free, so you might want to wait to make any improvements until after the redemption period expires to be safe. Check out the laws in your state to see if this applies and ask a trusted real estate agent for their advice.
Buying a foreclosure can also be a slower process than your typical home purchase because theres more paperwork, people and moving pieces involved. Even if the bank is eager to get the house sold, it could take weeks for an offer to get reviewed and accepted. Keep this in mind if youre on a tight timeline or cant afford to wait around on a deal that could fall through.
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.
Be Willing To Walk Away
In a regular home sale, buyers and sellers are typically both motivated to close a deal, and that benefits negotiations on both sides. Mortgage lenders are as detached as a seller can be in terms of closing any one particular deal, so buyers lose that advantage during negotiations. After investing so much time and often a lot of emotion into trying to close a deal on a foreclosure, its easy to find yourself settling for terms youre not happy with just to get into the house.
Your real estate agent can help you stick to your guns and make smart decisionsand can help advise you when its time to walk away if necessary.
If youre patient and make smart moves, you could become the proud owner of a formerly foreclosed home that was priced just right.
A foreclosed home is just one special type of home purchase. Heres how to make anotherand very differentpurchase, a new construction home.
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Tour Foreclosures In Person
One major benefit to buying pre-foreclosures or REOs is that you can tour the property before making an offer . If you’re not experienced in renovating and rehabbing properties, you should always tryto see a property in person before submitting an offer.
While you may not have time to order an inspection, you can bring a contractor with you to get an initial sense of any major flaws with the property â and what they’ll cost to fix. If your goal is to flip the house, this will be crucial forfiguring out your after repair value .
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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.
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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.
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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Review Your Appraisal And Home Inspection Carefully
Once your offer has been accepted, you’ll proceed to the next two hurdles: the home appraisal and inspection.
Unless you’re paying in cash, your lender will require an appraisal to ensure the home’s value aligns with your offer. If you’re paying in cash, you might consider ordering an appraisal to ensure the property you’re buying is worth its selling price.
Even more important, though, is the home inspection. As a buyer, it’s your responsibility to order a home inspection — this step is critical with a foreclosure. You’ll want to know about every potential issue because there’s a strong chance you’ll have to buy it as-is.
“Many banks and HUD will sell properties ‘as-is’ and will make no repairs after the sale,” says Bhatt. “But some banks will consider repairs after inspection and more so after appraisal, especially if they are lender-required repairs.”
Review your inspection results carefully to decide if the issues found are worth the discount you’re receiving on buying a foreclosure. Attempt to negotiate repairs for anything major, but be prepared to walk away if the damage is too extensive.
Stage : Mortgage Payment Default
When a homeowner misses at least one payment, this is called a payment default.
If a homeowner skips payments for a few months, the whole mortgage can go into default.
This usually starts the pre-foreclosure stage of the process of going into foreclosure. The lender usually sends a notice of default after 90 days of missed payments.
Referrals for foreclosure depend on the terms of the contract, as well as the policies of the lender and the investor.
Before a home is foreclosed and put up for sale, the homeowner is often given time to work out a new payment plan with the lender.
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What Should You Offer On A Pre
If the home is valued at $300,000, but the owners still owes $250,000 to the bank, they have to satisfy the bank. Blomquist says that after doing your homework on the homes valuation and what it might take to fix it up. You could offer $275,000. They walk away with some money in their pocket, and you get a home at a good price. But every scenario is different.
I know of some regular home buyers who have scored great deals on pre-foreclosure homes, he says.
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.
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What Is A Foreclosure
Foreclosures happen when a lender takes a property from an owner who has fallen behind on payments and defaulted on their mortgage. Lenders will then try to recoup as much of their investment as possible by selling a foreclosed home for slightly less than it might be worth. In the right situation, you are getting something below market value because the bank is motivated to get the home sold, says agent Rose Sklar of the Sklar Team at Coldwell Banker in Weston, Florida.
What You Should Know
- Buyers look towards foreclosed homes for great deals, but hidden costs and repairs can make some properties more expensive than they seem.
- To buy a foreclosed home, you will need to work with an experienced real estate agent and do your research so that you dont end up with any hidden surprises.
- Foreclosed homes can be sold at an auction, or listed for sale by the bank as a real estate owned property.
- A home inspection is important when buying a foreclosed home, since it allows you to see what repairs are needed and how much it will cost.
In 2020, there were 214,000 homes in foreclosure:
If you’re interested in buying a foreclosed home, there are a few things you should do. First, research the property and the foreclosure process in your state. This will help you understand what to expect and how to protect yourself. Next, get amortgage pre-approvalfrom a lender. This will give you an idea of how much money you can borrow, and whether or not you will be able to afford to buy the home. It also allows you to see themortgage ratethat you might qualify for, and the associatedmortgage interest coststhat you will be paying, which can be helpful when determining whether a foreclosed home is worth the purchase. Finally, work with a real estate agent who specializes in foreclosed properties. They can help you find foreclosed homes and guide you through the purchase process. In the section below, well take a detailed look at the steps to buying a foreclosed home.
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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.
Learn About Your Options For Buying A Foreclosed Home
Buying via a short sale
Basically, a short sale occurs when an owner sells their home for less than what they owe on their mortgage because the value has decreased.
An individuals home has yet to be foreclosed. Because the homeowner still owns the property, you must deal with their realtor to get the house sold.
For a short sale, the lender must approve your offer before you can close the deal. A lot of time could be wasted while you wait for the go-ahead.
Buying at auction
If you negotiate with the bank or a seller, it will take longer to buy a house than if you go through an auction.
At an auction, people can buy a house for a lot less than what its worth on the market.
Youll need a substantial sum of money to bid at most auctions because they only accept payment in cash.
If the auction allows for mortgage financing, you must get a preapproval from a lender.
When you buy a home at an auction, you agree to buy it as-is, without a formal inspection or appraisal.
This means that buying a foreclosed home at an auction is a big risk if you cant determine the true value of the property.
You should speak with a real estate attorney if this is a path youll be taking.
Buying from a lender
When you buy a home from a lenders real estate-owned inventory, you dont have to deal with the homeowner at all.
Before you buy a foreclosed property, the lender usually cleans up the title and kicks out the previous owner who didnt pay their mortgage.
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What Does Foreclosure Mean
When you buy a foreclosed home, a bank or lender has already taken ownership of the property.
This happens when a previous homeowner stops making their monthly mortgage payments, forcing the bank or lender to take ownership of the property.
There is a lien on your property because of every mortgage contract.
If you are unable to pay your monthly mortgage payments, your lender can take your house by putting a lien on it.
Most of the time, a homeowner loses their home because they cant pay their mortgage.
Once the property is in the hands of the banks and mortgage lenders, they will try to sell these properties, usually at discounted prices or with smaller down payments.
Therefore, if done correctly, buying a foreclosed home could be a big benefit for you since you might be able to snatch up a house that wouldve previously been out of your price range.
Why Foreclosed Homes Are Cheaper
The biggest selling point of a foreclosed home is, of course, its marked-down priceoften significantly lower than similar properties in the same area .
Most foreclosures are sold at a sizable discount from , with the exact amount varying from region to region. The seller may offer additional incentives such as a reduced down payment, lower interest rate, or the elimination of appraisal fees and some closing costs.
What makes these properties such a deal? If the residence is in the pre-foreclosure or short-sale stage, its owners are in a financial bind, and time is not on their side. They have to unload the property and get what they can while they can before they lose possession of it.
In short, these sellers arent negotiating from a position of strength and, while it may seem cruel to take advantage of their misfortune, a buyer can benefit.
The buyer can benefit even more if the property has been seized. The sheriffs office isnt interested in hanging onto a house, and banks dont want to be in the landlord business. Financial institutions typically want to rid themselves of foreclosed properties promptly. They need to get a reasonable priceThey have to answer to their investors and auditors. Still, buyers have an edge.
You should know that foreclosed homes are usually sold as is. If theres damage, repairs by the owner arent part of the equationbut, as used-car and vintage furniture aficionados know, as is translates into a discount.
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Get The Property Inspected
Getting a home inspection is always a good idea, but it is particularly important when buying a foreclosed home. Given that the bank has not maintained or had first-hand knowledge of the REO property prior to acquisition, there may be no record of property repairs or maintenance that would assess the true property condition. As a result, the bank is often unable to verify the condition of the property or complete a Sellers Disclosure. Be sure to have a licensed home inspector evaluate the condition of the house. Most REO homes are sold as-is, and the cost of repairs typically becomes your responsibility. Make a list of everything that needs to be fixed, research the costs, and factor in those costs to any offer you make to ensure you could cover the costs on top of your new mortgage payment. Please keep in mind, de-winterizing a home may be necessary to complete the inspection.
A property inspection is encouraged and will help you determine:
- Condition of the home
- A fair and reasonable offer
- Funding the purchase
If you find that repairs are needed for your REO purchase, you may want to consider an FHA 203 Renovation Loan. An FHA 203 Renovation Loan is a mortgage that can cover the purchase price plus funds for renovation by financing the as improved value of the home.