Finding and purchasing a home may be an exciting and often intimidating process. You want to make sure the house you purchase is a good fit for you and that you have a knowledgeable real estate agent guiding you through the process.
If you are looking for a house, you may want to consider buying foreclosed houses, also known as a real estate owned (REO) property. The lender owns a REO property as a result of the prior owner failing on the loan. This is also known as a bank-owned property or a foreclosure property. Here’s a guide on how to buy foreclosed houses.
Different Stages of Foreclosure
Finding foreclosed houses is contingent on where it is in the foreclosure process. Properties in the early stages of foreclosure or in the process of being short-sold may still be owned by the original houseowner or held by a bank or the government.
Here are five different types of foreclosures and techniques to purchasing them:
#1. Foreclosures (pre-foreclosures)
Pre-foreclosure occurs when the mortgage lender notifies the borrowers that they are in default but before the property is auctioned off. If a houseowner can sell their home within this time, they may be able to avoid a foreclosure process and the negative impact it will have on their credit history and future chances.
Pre-foreclosures are often listed at county and municipal courthouses. Furthermore, several web services, such as Foreclosure.com, list homes in the pre-foreclosure stage.
#2. Short-Term Sales
Short sales occur when a lender is willing to take less for a property than the amount outstanding on a mortgage. Borrowers do not have to be in arrears on their mortgage payments for a lender to agree to a short sale. They must, however, usually demonstrate some form of financial hardship, such as the loss of a job, which is likely to result in default.
Frequently, the property in question is underwater, which means it is worth less than the outstanding mortgage balance. To qualify as a short sale, the lender must agree to “sell the property short” by accepting less than the amount outstanding, and the house must be posted for sale. These homes are typically advertised as “waiting bank approval” short sales.
Purchasing a short-sale property is similar to a typical purchase in most ways, but the language in the contracts will differ, stating that the terms are subject to the lender’s approval. A bank may take several months to reply to a short-sale offer, making the process far lengthier than a typical purchase. Many real estate websites, including those run by individual businesses or listing agencies, allow you to search for properties based on their short-sale status.
#3. Auctions at Sheriff’s Sales
A sheriff’s sale auction takes place after the lender has notified the borrower of default and given the borrower a grace period to catch up on mortgage payments. An auction is intended to ensure that the lender gets rapidly compensated for the defaulted loan.
These auctions are frequently held on the steps of a city’s courthouse and are overseen by local law officials. At a publicly advertised location, date, and time, the property is auctioned off to the highest bidder. These notices can be obtained in local newspapers and on various websites by searching for “sheriff sale auctions.”
#4. Bank-Owned Real Estate
If a property does not sell at auction, it reverts to the bank, becoming a real estate-owned (REO) property. They are frequently administered by the REO department of the institution. Online resources like RealtyTrac contain extensive listings of bank-owned homes that may be searched by city, state, or ZIP code.
#5. Government-Owned Real Estate
Some houses are purchased using loans insured by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). When these properties go into foreclosure, the government seizes them and sells them through brokers who work for that governmental agency.
To purchase a government-owned property, you must contact a government-registered broker. Buyers can look into their options on the US Department of Housing and Urban Development’s website (HUD).
Why Are Foreclosed houses Less Expensive?
The most appealing feature of foreclosed houses is, of course, their reduced price—often much lower than comparable properties in the same region (known as “comparables” or “comps” in broker-speak). The majority of foreclosures are sold at a significant discount below market value, with the exact amount varies by area.
Buyers can also save money with incentives including smaller down payments, lower interest rates, or the removal of appraisal fees and some closing costs.
What is it about these things that makes them so appealing? If the house is in the pre-foreclosure or short-sale stage, the owners are in a financial bind—and time is running out. They must unload the property and acquire what they can while they still have possession of it. In short, these sellers aren’t negotiating from a position of power, and while it may appear harsh to profit from the misery of others, buyers can benefit.
Buyers stand to gain much more if the property has been confiscated. The sheriff’s office isn’t interested in keeping a house, and banks aren’t interested in being landlords. Financial institutions often prefer to get rid of foreclosed properties as soon as possible (at a reasonable price, of course—they have to prove to investors and auditors that they tried everything necessary to recuperate as much of the original loan amount as feasible). Buyers might take advantage of this situation once more.
Finally, foreclosed houses are typically sold “as is”—if there is damage, the owner’s repairs are not included—and, as used-car and vintage furniture enthusiasts know, “as is” translates into a bargain. Of course, as we’ll see later, “as is” might be a double-edged sword.
How To Buy Foreclosed Houses
Do you believe that buying foreclosed houses is the best option for you? Here are the steps you can take to buy foreclosed houses:
Step 1: Learn About your options for buying a foreclosed houses.
There are two major ways to buy foreclosed houses: at an auction or from a lender after the sale has failed.
#1. Purchase via Short Sale
A short sale occurs when a houseowner sells their house for less than the amount owed on their mortgage because the value has decreased. The foreclosure process has not been completed. Because the houseowner still owns the house, you must work with their REALTOR®.
When you buy a short-sale house, the lender (not the seller) must approve your offer. You may have to wait a long time for approval.
Purchase at Public Auction
You’ll receive a house faster if you go to auction than if you haggle with a bank or a seller. Housebuyers can also buy a property at auction for substantially less than market value. However, most auctions only take cash payments, so you’ll need to have a substantial amount of money on hand for the purchase.
If the auction does allow for mortgage financing, make sure you have a preapproval letter ready. It’s critical to understand that not all approvals are created equal. We propose a Verified Approval1, which verifies your income and assets.
By bidding at an auction, you agree to buy the house as-is, with no appraisal or inspection. This means that when you buy foreclosed houses at auction, you are taking a large risk. If this is something you’re interested in, speak with a real estate attorney.
#2. Purchase from a Lender
When you purchase a property via a lender’s real estate-owned (REO) inventory, you avoid dealing with the houseowner entirely. Before you buy foreclosed houses, the lender normally clears the title and evicts the present houseowner.
Most lenders will not sell a house to an individual; instead, you will need to work with an experienced real estate agent to inspect available properties. These houses are typically offered “as-is.” However, you will normally be able to view the house and schedule an inspection before closing.
Step 2: Engage the Services of a Real Estate Agent
Most lenders assign foreclosed properties to a REOagent, who collaborates with traditional real estate brokers to locate a buyer.
Not every real estate agent has worked with REO agents. A qualified foreclosure agent may assist you in searching for foreclosures, navigating your state’s REO buying process, negotiating your price, ordering an inspection, and making an offer. Investigate real estate agents in your region and make agent with one who specializes in foreclosure sales.
Step 3: Look for Foreclosure Houses for Sale.
Although your real estate agent will most likely be able to assist you in your search for foreclosure houses, you may want to conduct your own research as well. The internet has made it much easier than it used to be to locate foreclosures in your neighborhood and around the United States. There are now numerous sites of the web where you can search. Here are three that we particularly recommend:
- Rocket Houses: This online real estate listing repository will even tell you what type of foreclosure you’re dealing with.
- HUD: This official government website contains a list of foreclosed houses. There will be a real estate agent named who can be contacted by your own agent.
- Fannie Mae HousePath®: You can search for foreclosure listings (known as HousePath® properties) here by address, ZIP code, or MLS number.
- Freddie Mac Housesteps®: This is Freddie Mac’s equivalent to Fannie Mae’s foreclosure site, and it has very comparable functionality.
Step 4: Obtain a Mortgage Preapproval
Unless you buy houses at a foreclosed auction, you’ll most likely need a mortgage to finance your house purchase. You’ll want to be preapproved for a loan once you’ve selected an agent and started looking at houses. A preapproval tells you how much money you can borrow for a house. To restrict your search, select a lender and apply for a mortgage preapproval.
Step 5: Arrange for an appraisal and inspection.
When buying foreclosed houses, inspections and assessments are both essential. An appraisal is a lender obligation that determines the value of a property. Lenders want evaluations before making house loans because they want to make sure they’re not lending you too much money.
A house inspection is a more thorough examination of a property. An professional will stroll through the house, noting everything that needs to be replaced or fixed. Because foreclosures are more likely to have damage than houses for sale by owner, you should insist on an inspection before buying a foreclosed house.
Sometimes you don’t have the option of ordering a house inspection or assessment before you buy. You should only consider buying these types of foreclosed houses if you are an expert in house repair.
Step 6: Purchase Your New house
Read the inspection and appraisal results, then decide if the house is truly suited for you and if you’re comfortable buying a house as-is. If you have the funds or skills to undertake any necessary changes, contact your mortgage lender to finish your loan. Your real estate agent will assist you in submitting your offer and preparing for the closing.
The Dangers of Buying Foreclosed Houses
The primary advantage of buying foreclosed houses is the lower-than-market price. Nonetheless, these features are not without their drawbacks.
#1. Property Issues
While there is a compensatory discount, the condition as-is might be quite bleak. If the house is still occupied by the owners, it may be in terrible condition—if the people can’t make the mortgage payments, they may be falling behind on routine upkeep as well, let alone significant repairs. Furthermore, some people who are facing or have been forced into foreclosure are resentful, and they take out their frustrations on their house before the bank repossesses it. This frequently entails the removal of appliances and fixtures, as well as intentional destruction.
#2. Costs Not Mentioned
Along with unplanned maintenance and remodeling work, delinquencies such as back taxes and liens—which auction homes frequently have attached to them, either by the IRS or state or other creditors—can add additional expenditures to an otherwise appealing house. Whatever is owed to the government must be paid and addressed before the buying procedure can begin. This is especially true for auctioned-sold properties; a bank will always pay off any debts related to the property before reselling it to another party.
#3. Protracted Procedure
The previous issues frequently result in a large amount of documentation. Foreclosures typically have a number of additional documentation that must be completed in order to prepare for the closing, which isn’t always so quick. If it’s a short sale, the owner’s lender must authorize the transaction, which, as previously stated, can take some time. Serious damage discovered in the house may result in a reduced house assessment, affecting the buyer’s ability to acquire a financing. Some lenders will not lend less than a particular amount since the profit possibility on a smaller loan isn’t worth the risk.
While you’d expect a bank would be anxious to sell a repossessed home, response times between the bank and other parties involved can be slow with REO properties. The time it takes to receive a response to your bid might vary greatly; if the bank holding your home is overburdened with foreclosures, it may take a long time to complete your request.
Banks with significant backlogs have been known to react to an offer after up to 90 days. If you intend to finance the purchase, you should take the time to get preapproval for a mortgage.
#4. Competition
As with any market, anytime there is an opportunity to obtain something at a lower price than the going rate, demand will skyrocket. When dealing with valuable foreclosed properties, heightened interest and competition are unavoidable, not only from possible occupiers but also from investors and professional house flippers.
Often, a foreclosed house can be priced far lower than comparable houses in the neighborhood. When news gets out, multiple offers can pour in quickly, resulting in a bidding war. As a result, what was once a bargain might quickly become a pricey property.
Prospective purchasers of foreclosed houses should place offers on multiple properties at the same time because rival buyers may be able to secure a property with a better bid or an all-cash offer. However, don’t be disheartened if someone else outbids you on a particular property; instead, keep checking back to see whether it returns in the bank’s inventory. Foreclosure transactions frequently fail.
In conclusion
Buying a foreclosure might be a once-in-a-lifetime chance for homebuyers seeking reduced costs or below-market value, or for total house restoration projects. Keep in mind that many foreclosed houses may have substantial structural damage and are typically sold “as-is.”
If you want to take a chance on a foreclosure, contact an experienced real estate agent. Because most lenders do not sell to individual buyers, your real estate agent will assist you in navigating the foreclosure process.
Once you’ve found a house you like, obtain an appraisal and a property inspection. A mortgage preapproval will also be required to get funding. Once the results of your inspection appear satisfactory, follow up with your lender and agent to finalize the deal.
