What Is A Foreclosed Home?
Buying a foreclosed home can be a great real estate investment. But exactly what is a foreclosed home?
Unfortunately, some homeowners find themselves in situations where they can no longer meet their financial obligations.
Some difficulties that can affect a person’s ability to pay bills are due to loss of job or decrease in income, sickness or unexpected bills. Maybe they have fallen so far behind in paying bills that they are finding it a struggle to catch up, even though they are working.
These issues can have a major impact on paying debtors as promised. Normally, most lenders will try to work with homeowners during such hard times. However, if late payments or missed payments persist, mortgage lenders may seize the property.
Foreclosure is the action of taking possession of a property when the mortgagor does not keep up their mortgage payments.
Although losing a home is unfortunate for the homeowner, it could be a great opportunity for potential home buyers looking to save money. However, there is always some risk involved when considering this option. It is best to arm yourself with knowledge before trying to buy a foreclosed home.
In this post, we will go over some major things that you should know about buying a foreclosed home: The two types of foreclosed home categories, how to know if you are getting a good deal, the pros and the cons of buying a foreclosed home, placing a bid, paying for it, and where to find foreclosed homes in your area.
After reading this post, you will have a good understanding of buying a foreclosed home and whether it is right for you.
Types of Foreclosed Homes
Once the homeowner stops making payments, ownership will go to the lender. The lender will categorize the home as a “Bank-Owned Home”.
The lender will start taking legal actions to have the homeowner removed from the home and the house put up for auction.
If the house does not get auctioned off, the lenders categorize it as “Real-Estate Owned Properties” (REO).
This means that the bank or lender will keep possession of the home until they can sell it. There are some real estate agents who specialize in selling “REO” homes. Often, this is who the banks will use to sell off the property.
If Interested in Buying A Foreclosed Home What Should You Do?
As stated by RealtyTrac, as of January 2018, in the United States there were close to 570,899 homes in some stage of foreclosure.
If you are interested in buying a foreclosed home, know that there are two types of real estate auctions: live (in-person) and online. Making major purchases online has exploded over the years, and it includes online auctioning in this increase. To get started on your venture to buy a foreclosed home, start here.
- Speak with a real estate agent or attorney for advice
- You can use an online site like Foreclosure.com to find foreclosed homes in your area and around the nation. This company updates its database at least twice a day to keep you updated with the newest and best buying opportunities.
- If you find a home in your area, drive by to check it out. However, do not trespass or disturb the occupant! Doing so is a criminal offense.
- Once you find a home that you are interested in do your research.
- Research the estimated resale value of the property
- Research how much the borrower owes on the mortgage
- Research whether there are any liens against the property. This one is especially important because if the owner has any unpaid liens on the house and you make the winning bid, you may have to pay off those liens. To avoid this, it would be a good idea to hire a title company or real estate attorney to run a title search on any property that you are considering bidding on.
- Read and understand all due diligence documentation.
Search For Foreclosed Homes In Your Area Today!
So What Are The Signs You Are Getting A Good Deal?
- The home is in a safe, thriving neighborhood.
- Renovation and repairs are within your budget.
- The previous owner has resolved all unpaid liens.
- You saved money.
When done wisely, buying a foreclosed home can be very beneficial. It gives you the opportunity to use your creative skills and talents to fix up a home just the way you want it, and at a lesser price than buying a newly built home.
I am always in awe of the renovation work by The Property Brothers or by Chip and Joanna Gaines. How they can take a home that appears to be in ruin and make it look absolutely beautiful, it just amazes me!
However, before purchasing a foreclosed home it’s best to know the pros and cons of buying one. Let’s look.
The Pros and Cons of Buying A Foreclosed Home
- It is possible that you may get a fantastic deal on the home and save lots of money.
- Because no one is living in the house, you can move in as soon as they complete things.
- You can redesign the entire house to your pleasing if you desire.
- You could probably get more rooms and space than what you would if you purchased a newly built home for the same price.
- Sometime the bank or lender will only deal with one realtor and this is who you will have to work with.
- The pre-approval process can take several weeks while your prospective lender looks into your employment, pay stubs, and credit history (and your partner’s, too). This means someone else could buy the house of your dreams by the time you get all your paperwork in order. The best deals will go quickly.
- If there are a lot of foreclosed properties in your area, the one agent may be very busy helping others and not be able to give you a lot of their time. Know what you want and ask to view only those properties that really match your needs and budget.
- There is little room for negotiation on price because the bank will want to recoup as much of their losses as possible on a foreclosed home to make up for the unpaid portion of the mortgage.
- Check websites like Trulia and Zillow to see the typical price houses recently sold for in that neighborhood, to be sure you really are getting a good deal.
- The home may not be in great condition.
- Any issues found by the property inspection will need repairing by you, not the bank.
- People who lose their homes will often leave it in a bad state of repair or worse still, vandalize the property. They might also leave a lot of their things behind. The garden, guttering, plumbing may all need maintenance.
- You might have trouble getting electricity, water, and other utilities turned back on after the previous account holders defaulted.
How to Get Around the Cons
Although the cons outnumber the pros, you could still come out better buying a foreclosed home. Here are a few things you could do:
- Have a thorough inspection of every home you are considering buying and a detailed list of issues provided.
- Ask the realtor for recommendations for reliable inspectors. Also, ask for recommendations for contractors who could carry out the needed repairs and get quotes. You can research contractors in your area using online sites such as HomeAdvisor or ask friends and family if they know anyone reliable.
- You can also assess how many of the jobs on the list you can tackle yourself before you move in. In most cases, you should be able to handle cleaning and painting, but if you don’t have time, hire professionals to do the essentials.
Foreclosure home sales will usually go more quickly than other types of homes. However, if you feel too rushed or uncertain, it is best not to buy.
Financing The Home
You may have to pay cash, bank money order, or cashier’s checks for the full price of the home immediately. However, in some states, you may pay a percentage and the rest within a certain time period.
According to Steve Udelson, president of Altisource Online Real Estate, “homebuyers who place the winning bid at a real-estate auction pay cash, but they do have financing options. Those planning to live in the property as a primary or secondary residence can get the same financing—a conventional or jumbo mortgage—they would get if purchasing any other home.”
7 Steps to Getting Your Foreclosed Home Financed
- Get pre-approved
- Find a real estate agent. One with experience working with REO Homes
- Make an offer
- House inspection
- Renovate and repair
To get more details on the home buying process I suggest you read the article “How Long Does It Take to Buy A House?” This article goes further in-depth explaining each part to the home buying process.
Bid On the House
You will first need to register to place a bid on the house. You may also have to provide proof that you can pay the full auction price. You will also need to pay fees and commissions if you are the winner of the bid.
They may also require you to place a deposit before you can bid on a foreclosed house. The required deposit can differ from state to state. However, bidders typically pay 5 to 10 percent of the expected final bid amount.
If you are going to a live auction, be sure to ask for your bidder card. If it is an online auction, they will give you something equivalent to a bidder card to identify you as the bidder.
Raise your card when you hear a good price for you. If you are attending an online auction, they will instruct you what to do.
Remember, if your bid wins, they may require you to pay the amount right away or by the next day.
For further detailed information on bidding, check out this article: How Do I Bid On A Foreclosed House?
Unless you are a professional in making home renovations and repairs, we highly advise against buying a foreclosed home that is run-down. You may pay a cheaper price for the home, but it will cost you in the high thousands to fix. Especially if you are untrained and trying to do it yourself.
No matter which route you choose, whether live or online, remember that buying a foreclosed house can have complications. We highly advise that you speak with a real estate agent or attorney who works with foreclosed homes.