How to Buy a Foreclosure: Getting Ahead By Purchasing a Foreclosed Property
Buying a foreclosed home is different than the usual home buying process. Homeowners on a budget, concerned with monthly mortgage payments, or want a home outside their budget may find the right solution in buying a foreclosed home, as they are offered at lower prices through a bank or lender. Purchasing a foreclosed home gives buyers the opportunity to purchase a home that would otherwise be more expensive.
Although a few extra steps are involved, these tips can help home buyers decide whether buying a foreclosed home is the right option. Before they get started, homeowners should be prepared to research and put in more effort in the purchase of a foreclosed property. Additionally, they should work with a real estate professional along with other experts throughout the process to make the experience better overall.
Where Can Buyers Find Foreclosed Homes?
In addition to being more difficult to purchase than standard homes, foreclosed homes can be more difficult to find. Home buyers should work with their real estate professional to locate foreclosed homes in the area where they would like to purchase, as real estate professionals have access to listings and directories of foreclosures that may not be accessible to the public. There are other ways to find foreclosed homes as well, including:
- Public records. Check the public records in your local county or municipal offices; look for homes that are listed under notice of default and notice of sale.
- Standard listings. Many foreclosed homes are eventually listed on the standard listings websites; home buyers can check on real estate listings just like they can look for standard homes as well.
- Local newspapers. Local newspapers are a good resource for home buyers, as they have access to the same public records that everyone else can access and will publish foreclosed homes for everyone to see.
- Attorneys and real estate wholesalers. These professionals have inside knowledge of foreclosures and will sometimes release this information to people who they know.
Getting Pre-Approved for a Mortgage
The first step to buying a foreclosure property is for buyers to get pre-approved for a mortgage. A mortgage pre-approval is different than a mortgage pre-qualification, as mortgage pre-qualification is the first step in the mortgage approval process. To get pre-qualified, home buyers must contact a lender and answer questions about their financial status.
After completing the pre-qualification process, the lender will determine how much money the buyer will be able to borrow if the answers the home buyer gave to the lender are accurate. Since pre-qualification is based on the answers the buyer gives and not the facts, a pre-qualified buyer is not necessarily a sure thing.
The pre-approval process requires the home buyer to submit documentation that supports the answers to the questions in the pre-qualification process. Pre-approved buyers are more likely to be approved for their mortgage, so pre-approval is the proper first step to buying a foreclosure.
To become pre-approved, the home buyer must contact a lender and start the mortgage approval process well before the date they hope to buy a foreclosed home.
How to Buy Different Types of Foreclosed Homes
Foreclosure occurs in stages; foreclosed homes can be bought during these different stages, with the purchase process depending on the stage of foreclosure the home is in. Therefore, undestanding the different stages can help home buyers determine what they will have to do in order to purchase a foreclosed home. Additionally, understanding the different processes can help home buyers decide what type of pre-foreclosed homes they would like to purchase.
Pre-foreclosed homes can be sold in a process known as a short sale. Short sales are not technically foreclosed homes because the foreclosure process has not been completed. Pre-foreclosed homes are sold by homeowners with the permission of their lender. Often, homeowners who sell their home as a short sale are in financial distress, and they are seeking to sell their home to stop the foreclosure process.
Pre-foreclosed homes take longer to sell than standard homes, as they are often sold for below market value. Home buyers who wish to purchase a pre-foreclosed home must display patience, as sometimes purchasing pre-foreclosed homes can take months. Benefits of pre-foreclosed homes include:
- Pre-foreclosed homes are a good deal.
- Homes sold in pre-foreclosure are sometimes in better condition than fully foreclosed homes.
However, there are many disadvantages of purchasing a pre-foreclosed home.
- Even after the home purchase offer is accepted by the homeowner, the lender may reject the contract.
- Pre-foreclosed homes can take many months to purchase.
- Sometimes, lenders simply ignore purchase offers from home buyers.
In order to purchase a pre-foreclosed home, it is important for home buyers to work with an experienced real estate professional.
The short sale process proceeds like this:
- The homeowner turns in an application to the lender requesting for the home to be sold as a short sale.
- The buyer makes an offer and the homeowner accepts it.
- The homeowner submits the accepted offer to the bank.
- The bank accepts, ignores, rejects or counters the offer.
- When there is an offer accepted, the sale of the home proceeds much like any other home sale.
Short sales generally occur because the home is worth less than the value of the mortgage, a condition known as being "under water." The reason the homeowner must get permission to sell the home as a short sale is because the homeowner can sell the home in a standard sale if the home was worth more than the mortgage. As long as the home is worth less than the mortgage, the lender must take a loss.
Homes that are foreclosed upon are typically sold at auction, which are public and sometimes very large events. Foreclosed homes are often sold at a heavy discount. The process for purchasing a home at auction is below.
Auctions are listed in local papers and are also posted on websites dedicated to foreclosure home purchases. The home buyer can find auctions for homes they're interested in purchasing.
Before making a purchase, the home buyer must do research to find out the condition of the home, whether there are any liens on the home, and how much the current homeowner owes on their mortgage. Having this information is important—especially information regarding any liens—because the new home buyer may have to pay the liens themselves.
Often, it is difficult or impossible to find out much about the condition of the home. Buyers interested in purchasing a foreclosed home can find out a little information by driving by the home. However, these homes are often still occupied by their owner, and there is no way for the interested buyer to go inside.
Home buyers must know how they plan to purchase the home. This can be done by cash or with a mortgage unless otherwise noted as cash only. Many states require the winner of the auction to produce the money for the house as soon as the purchase is made; therefore, all financing must be ready before the home is purchased.
Attend the Auction
Foreclosed home auctions are often cancelled or postponed, as events take place behind the scenes relating to the foreclosure. Home buyers who would like to purchase a foreclosed home should confirm on the day of the auction to ensure it is still taking place.
At the auction, the home buyer who wins will get a certficate of sale and eventually, a certificate of title. During that time, the original homeowner may take some action to get their home back, which is why it is important for the home buyer to avoid making any changes to the home until they have the title.
If a foreclosed home does not sell at auction, then it becomes real estate owned, or REO, meaning the property is owned by the bank. Real estate owned properties are often listed on the MLS website and are sometimes listed on the bank's website as well. Banks often have an entire section dedicated to the sale of REO properties.
REO properties are not often sold at a major discount; sometimes, REO properties have been standing vacant for a long time. Even if they look fine on the outside and did not have major damage when the house went vacant, time without maintenance and occupancy can have a detrimental effect on a home. Home buyers who are considering an REO property should get an appraisal and a home inspection before making an offer.
Most REO properties are sold "as-is," meaning they come with no warranty and banks will not make any repairs. Therefore, home buyers interested in REO properties must be prepared to make major repairs, upgrades or renovations when they move into the house. Sometimes, this makes an REO property ideal for a home flipper or someone who has strong DIY skills.
Banks that will not negotiate on price may negotiate on the terms of the loan, if the home buyer applies for a loan through the same bank that owns the property. Additionally, some banks may allow the buyer to finance the entire price of the home or more, if extensive repairs are necessary.
Home buyers should run a title search before making an offer. Most of the time, banks will clear the title before listing the house for sale, but it is important to check either way. Sometimes, home buyers have difficulty purchasing an REO property with loans such as VA loans and FHA loans, as these loans require the property to be "turn key." This gives more reason to apply for the loan through the lender that owns the home, as the flexibility on the loan could become important.
Additionally, it is important for buyers to work with a real estate professional who has experience with REO properties, as they can help the home buyer negotiate the terms of the home. REO properties are similar to short sales in that they can take a long time to be approved; therefore, buyers must exhibit patience when negotiating the purchase.
When a homeowner defaults on a government loan, or when a homeowner fails to pay property or income taxes, the government may foreclose on the house. Buying a government-owned home is not much different from buying any other foreclosed home. Government-owned homes are available for sale on government sites where they are listed together with information about their auction day, the value of the home and pictures of the interior.
Government-owned homes are often in relatively good condition because the government will often make repairs for the home and sell the home for a competitive price. There is some misconception that government-owned homes are available at a discount. Typically, this is not the case, unless there is something wrong with the home.
Additionally, government-owned homes are sold through auction, just like standard foreclosed homes. Homeowners who bid on a government-owned home can secure financing after the auction.
An experienced real estate professional can help the home buyer determine what would be a fair price for the house. Having this kind of direction before attending the auction can help the home buyer decide what the limit is on what they are willing to spend. Purchasing a government-owned home is different from purchasing other types of homes, which is why a real estate professional can give the home buyer advice and answer their questions, walk them through the process, and make the home purchase process easier and less stressful overall.
Government-owned homes are different from standard foreclosures in some ways. For example, in the first round of auctions for government-owned homes, the only people who are allowed to bid are people who plan to use the home as their primary residence. People who wish to flip the home or rent it out will not be able to bid in the first auction. Having this information and other information like it can help make the process of buying a government-owned foreclosure easier overall.
Do Your Research, Work With the Experts
If you're a home buyer thinking about purchasing a foreclosed or pre-foreclosure home, work with the experts throughout the process. By contacting a reputable lender and working with a real estate professional who has experience these these kinds of purchases, home buyers will find that purchasing a foreclosed home can be worthwhile.
Home buyers should do their research before getting started and should know what kind of home they would like to purchase and what they will need to do. The more home buyers know in advance of making a purchase, the better.