Why Buy Foreclosed Properties and How to Do It

Foreclosed property is different because they are owned by the bank. As mentioned before, buying foreclosed property usually means that you’re getting a killer deal. They are typically sold pretty low below market value and you can probably get more square footage per dollar when you are buying a foreclosed property. Usually foreclosed homes are purchased for “flipping”, which means buying a home at wholesale cost and renovating the home to sell for profit.

Since they are bank-owned and usually cheaper, these homes need fixing and care because they have been neglected, but even with the renovations the total cost of the home could be cheaper than what is on the market. As the homebuyer, however, make sure that you get a home inspection from a licensed home inspector and make your offer contingent on the inspection.

Not all bank owned properties are listed below market value, however, as its the goal of the bank to recoup as much money as they can back for the property.  Because of this, you should utilize your realtor to find comparable properties in the area and understand how long the property has been listed, as the asking price may drop if its been listed for a longer period of time.

How to Buy Foreclosed Property

Buying foreclosed property can be an attractive option to some because when you hear the word “foreclosed”, you automatically assume that the property value is cheaper. That is very well the case since most foreclosures happen, due to the homeowner being unable to maintain their monthly payments. The most popular example of this is the housing crisis of 2007-2011 when the mortgage industry collapsed and many homeowners in America became underwater on their mortgage.

When people were laid off and no longer earning income, they couldn’t afford their mortgage payments. Feeling hopeless, homeowners decided to foreclose on their property and walk away and start over. While these types of properties are cheaper than houses that are on the market, they do take the extra effort to purchase.  We have composed some of the best tips for buying a foreclosed property:

Get a preapproval letter

A preapproval letter comes from your mortgage lender and will detail how much money you are able to borrow after a lender reviews your credit score and income. This also includes understanding how much you are willing to put down for the down payment.

Utilize a specialized real estate agent

You should look for a real estate agent that specializes in the foreclosure process.  These are realtors that have training such as the Certified Distressed Property Expert or the Short Sales and Foreclosure Resource.  These agents will be on the look out for foreclosure properties that meet your requirements and can bring the foreclosed home to you.  Like other realtors, they will also be able to give you comparable properties, analyzing home sales and tax assessment history in the area.

Buy in “as is” condition

You need to understand that foreclosure properties are usually sold “as-is”, so you need to make sure that you conduct a home inspection before proceeding with your home purchase.

What does foreclosure mean?

Foreclosure is the legal process where an owner forfeits all rights to the property.  If the owner of the home can’t sell the property, the property goes to a foreclosure auction, and, if still doesn’t sell, the lending institution will take possession of the property.  There are 5 main stages of a foreclosure:

The owner is unable to make timely mortgage payments

The borrower is unable to meet the terms of the loan.

Lender records a public notice

Usually after 3 to 6 months of missed monthly payments, the lenders will issue a public notice that shows the borrower has defaulted on their mortgage.

The borrower enters Pre-foreclosure

This period usually is from 1 to 4 months and allows the borrower to try and work out an arrangement with the lender, typically via a short sale.

Foreclosure auction date is set

During the auction, the home is sold to the highest bidder for a cash payment.

Real estate owned (REO)

If the property is not purchased, the lender now takes ownership of the property and are usually listed by a local real estate agent for sale.  Online real estate companies like Zillow and Redfin will also list bank-owned properties.

Foreclosed Property Warning

There are some things to keep in mind when it comes to buying foreclosed homes. More often than not, the property won’t be in the best living condition. It might be “inhabitable”, meaning that you can technically live there but there will most likely be some damages and it won’t be comfortable. Sometimes these damages are intentional and deliberate, caused by the previous owner out of frustration of losing their home. It can get pretty bad ranging from huge holes in the walls to broken countertops. There’s also the chance that the destruction was caused by the house being unoccupied and left to be vandalized by others.

Since the previous homeowners weren’t able to afford their mortgage payments, you can bet that they were unable to maintain the home as well. It’s important to do a thorough home inspection checking for even the most basic things such as termite damage, broken outlets, broken garbage disposal, etc. There will most likely be water damage since the house was neglected. Check for mold growing anywhere or burst pipes or roof leaks since the house probably hasn’t been unlocked for months, and a lot could happen in a couple of months.

It’s also important to note that foreclosure isn’t something that happens suddenly. After not being able to pay their mortgages for an extended amount of time, some homeowners aren’t given the luxury of a notice of eviction. There have been times where the homeowners have been locked out of their property before they’ve had the chance to pack their belongings. It is also highly probable that the homeowners simply decided that they didn’t want to deal with it since moving costs would be an additional expense that they can’t afford. If you happen to have a lot of pre-owned items in your house, they have now become your full responsibility. The bank technically owned it, but after you bought the home, everything in it also becomes your property.

The Buying Process of Foreclosed Homes

Buying a foreclosed property raises a lot of red flags for lenders. They know that the property is in terrible shape and is in desperate need of expensive maintenance and remodeling. Because of this, lenders aren’t very willing to loan you the money to buy the property. When going through the process of purchasing a traditional home that’s on the market, you are required to have an appraisal and a home inspection. These two determine the value of your home and also the structure of the home and the lender will decide if the property is worth lending money for purchase. Even without getting an appraisal and a home inspection, the lender already knows that the property value won’t be very high and the home inspection will have a long laundry list of repairs that will be mandatory in order for you to even live in it.

That’s not to say that it’s impossible to get a loan for a property that’s been foreclosed. It is possible, but it isn’t as easy. Because of this hurdle, most foreclosed homes are bought in cash with a cashiers’ check. With a cash purchase that’s paid in full, there is no risk because there isn’t a lender in the picture to loan you money, so there are no questions asked. If you don’t have cash up front to pay for the house in full, it is possible to get a loan, but there could be strict requirements to go with it.

How to buy a foreclosed home

When looking into buying a foreclosed home, it is very important that you find an experienced real estate agent that specializes in foreclosed properties. A foreclosure sale involves a lot of back and forth with the bank and it also requires a different contract, along with different local and state foreclosure laws. The foreclosure law are different in every state, so having a real estate agent that is properly equipped to go through this journey will make your life so much easier. Since most lenders aren’t willing to finance a foreclosed home, the best way to go about this is to get a mortgage from the bank that owns it.  Another tip if you are looking into the foreclosure market to buy a foreclosed home utilizing a government loan like a Veteran Affairs Loan or FHA loan, you should make sure that you meet the housing standards that these loans come with before starting the buying process.

Buying Your Home At An Auction

A popular way to buy foreclosed homes is through an auction. This auction could be held in person or online and it’s filled with people who are looking to purchase homes for flipping. Since most people who are at these auctions are professionals, it’s best to do your research and come prepared.

Physical auctions are usually held at local government courthouses, hotel conference rooms, or any other location that is decided by the auction company. These auctions are usually held by bank-hired trustees. There are instances where an open house is held for the property and the listing is made public with a description of the property. While open houses are possible, most of the time you won’t be given that luxury.

You won’t have a clear idea of the home until you buy it and see it for yourself and there have been instances where the property was in much worse shape than they had anticipated. Buying foreclosed properties at an auction can be a big gamble and it’s up to you to decide if that’s a risk you’re willing to take. If you’re buying through an online auction, chances are you’ll only be given a limited number of pictures to browse through and there’s a high probability that you’re seeing the home in the best light with the best angles and features.

Since this is an auction, it’s best advised that you come prepared with a cashier’s check ready for the total amount you’re willing to pay. This should include auction fees in addition to the amount you’re willing to purchase the home for since most of the people you will be competing with are most likely real estate professionals who can afford to pay for the home entirely in cash. If you don’t have that much cash on hand, there are auctions that allow for financing. In this situation, it’s best to get pre-approved before showing up. Some auctions will have a partnership with other lenders and prefer that you work with them to buy your home. If this is the case, using a mortgage calculator to get a feel for the interest rates from competing lenders will help. You won’t be walking into the situation blind and you might be able to have some leverage.

The Bottom Line

Buying a foreclosed property could be a great deal, but it’s important to keep in mind the amount of money that’s going to go into repairs. Repairs to the home can be incredibly expensive, so be sure to account for that when budgeting. It’s important to also know yourself as a person to see if this is something worth going through.

If you are the type of person who likes home projects and doesn’t mind having hands on experience with the repairs, then you are a great candidate. If you already know that you are going to have to hire a company to do everything for you, but don’t mind because you’ll be able to customize it and have your dream home, that’s also great. Just know that you will have purchased your home for the same amount as if you were purchasing a home on the market. If you are looking for a great deal, but aren’t looking to cut costs by doing projects yourself, then I would advise against buying foreclosed property.