If you are a bargain hunter, you may be tempted to buy property that has been foreclosed. While this procedure has traditionally been practiced only by serious real estate investors, the recent increase in foreclosures has made it an attractive option for some ordinary homebuyers.
That’s because foreclosed homes almost always cost significantly less than other homes in the area. They are priced by the lender (typically, a bank), who wants the homes off of their books.
What Does Foreclosure Mean?
Every mortgage contract has a lien on the property. A lien allows the lender to take control of the house if the borrower stops making mortgage payments. If a borrower can’t come up with the funds to pay what they owe, a lender will issue a notice of default.
If the homeowner hasn’t come up with the money within 90 days of the notice of default, the lender will issue a notice of sale, which will state that the trustee (the lender) will sell the home at auction within 21 days to the highest bidder.
How To Buy A Home in Foreclosure
There are three principal ways to purchase a foreclosure: directly from the homeowner, at an auction, or from a lender after the house has failed to sell at auction.
- Purchase from the homeowner through a short sale: A short sale occurs when the homeowner sells a home for less than what they owe on the mortgage. In this case, foreclosure has not been completed yet. When you buy a home in a short sale, the bank (not the homeowner) needs to approve your offer. You might spend a lot of time waiting for approval – banks are notorious for making buyers wait a long time.
- Purchase at auction: You’ll get a home faster at auction than you would if you negotiated with the bank. Homebuyers have the opportunity to buy a property significantly below market value at auction.
- However, most auctions only accept cash payments, which means that you’ll need to have a significant amount of money ready for the purchase. If the auction does allow for financing through a mortgage, you want to make sure that you have a preapproval ready. It’s important to realize that not all approvals are the same. It’s a good idea to get a “Verified Approval” document, where your income and assets are verified by your bank.
- By purchasing at an auction, you agree to buy the home as-is, without an appraisal or inspection. This represents a significant risk. Speak with a real estate attorney if this is something you’re interested in.
- Purchasing from the lender: If the house does not sell at auction, you can buy it directly from the lender. Note that most banks won’t sell a home directly to an individual; you’ll need to talk to an experienced real estate agent to view available properties. This method provides the lowest price for the home. Banks aren’t in the business of owning houses, and they want to get them sold. Nevertheless, even if you offer cash, don’t expect a deal on a bank-owned property to proceed quickly. Multiple pairs of eyes must review the deal and respond to your offer.
How Does a Foreclosure Auction Work?
If you’re new at real estate auctions, attend a few with the intention of learning, not buying. Some are small trustee auctions that don’t 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 you’ve found a property you like.
When you’ve 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. Many auctions require bidders to bring a certified check for, say, $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.
What Are the Disadvantages of Buying a Foreclosed House?
The biggest caveat when buying a foreclosed home is that it is typically sold as is, which means that no one is not going to fix any problems. And there may be plenty of them, considering that many foreclosed homes are in serious disrepair due to the owner’s financial strain. Foreclosed homes risk costing buyers a lot of money to renovate, which could negate their expected profit.
You can protect yourself by taking the following steps:
- Research how long the foreclosure sat vacant and whether it has experienced anything that may have caused significant structural damage. Homes in a dire state of disrepair won’t be eligible for a conventional mortgage.
- If you can, hire a home inspector to thoroughly check out the foreclosed home for major problems. Have the inspector give you an estimate of how much money it will take to make repairs.
- You can try to add loan and inspection contingencies to your offer. That way, if you do encounter problems with the home or attaining a mortgage for it, you can back out of the deal without losing your deposit. Just keep in mind that asking for contingencies does not mean the bank will accept them; they’re not the norm when you buy a foreclosure.
- Hire a lawyer to conduct a title search. This will allow you to avoid all kinds of nightmare scenarios. For instance, let’s say the IRS has a lien on the property for back taxes. That debt doesn’t stay with the owner once they sell. Instead, the lien says with the property, making you the buyer responsible for repayment.
Where Can I Find Foreclosed Properties to Buy?
The first place to look for houses that are in foreclosure is to look on a standard multiple listing service website (MLS). Other choices include:
- You can also look at bank offices and their websites, and in local newspapers.
- A more direct route is to go through websites that specialize in homes and properties in foreclosure, such as:
- 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 and Freddie Mac HomeSteps: Here you will be able to search for foreclosure listings by address, ZIP code or MLS number.
- Some financial institutions (such as Bank of America) also have web search pages for foreclosed homes.
- Lenders increasingly are selling seized assets through real estate agents, so don’t hesitate to ask a real estate broker or agent to look for opportunities. Some real estate professionals even specialize in foreclosure properties.
Drawbacks Of Buying A Foreclosed Home
There are certainly foreclosure bargains to be had. However, there are also greater risks than buying a house on the open market. Below are some of the drawbacks to buying a foreclosed property.
- Increased maintenance concerns: Some homeowners have no incentive to maintain the home’s condition when they know they’re going to lose their property to foreclosure. If something breaks, the homeowner won’t spend money to fix it, and the problem could get worse over time.
- As-is sales: The lender’s main concern is recouping their money as quickly as possible, which means an as-is sale in almost every instance. You shouldn’t buy a foreclosed home if you don’t have a significant amount of cash to invest in repairs.
- Property problems: If the home is still being occupied by the owners, it may be poorly maintained. If the people can’t make the mortgage payments, they could well be falling behind on regular upkeep, not to mention major repairs.
- Some folks facing foreclosure are embittered, and they take out their frustrations on their home before the bank repossesses it. This can extend to removing appliances and fixtures or deliberate vandalism.
- Hidden costs. Auction properties often have delinquencies such as back taxes and liens attached to them. The liens may be imposed by the Internal Revenue Service (IRS), the state, or other creditors. This can add further costs to an otherwise desirable house.
- Slow process. In a short sale, the owner’s lender has to approve the deal, and that can delay closing. While you’d think a bank would be eager to unload a repossessed residence, response times between the bank and other involved parties can be sluggish.
Should I Seek Help from an Attorney?
Contacting a foreclosure attorney can help you smoothly navigate a foreclosed property purchase. You should especially consider speaking with an attorney if you are new to the real estate industry and are unfamiliar with real estate laws in your state.