How To Buy A Foreclosed Home?
Ever wonder how to buy a foreclosed home? The dream of buying a foreclosed home revolves around the idea that you can purchase a home for well-below market value - usually at tens of thousands of dollars below its value!
The only problem is where to find foreclosed properties and how to buy them without getting burned in the process. In this article, we will briefly cover how to purchase a foreclosed home, how the stages of foreclosure affect how to purchase them, and ways to finance your property.
In this article, we will take a brief overview of purchasing foreclosed homes, including where to find them, types of foreclosures, approaches to buy them, the benefits of buying a foreclosure, and how to find financing.
Where Can I Find Foreclosed Homes?
The following are the most common ways to find foreclosed homes:
- Multiple-listing service (MLS) websites, such as Zillow, Redfin, and more.
- The property section of local newspapers (including online websites)
- Pre-foreclosures listings in county and city courthouse buildings.
- Fannie Mae’s HomePath.com
- Searchable database of foreclosed properties through financial institutions (ex. Bank of America: https://foreclosures.bankofamerica.com)
- Real estate agents/brokers (some agents specialize in foreclosure properties)
- From the government through the U.S. Department of Housing and Urban Development
- RealtyTrak has extensive online listings for lender/bank-owned properties
Stages of Home Foreclosure
To find a foreclosed property, it is important to know which phase of the foreclosure process the property is currently in (or headed). Depending on whether the property is owned by the original homeowner or by an entity such as the government or a bank, you can gain leverage and insight into how much you should offer for the property.
The following are five types of foreclosure and how buyers should approach each scenario:
- A property is in default to the mortgage lender but the property has not been offered for sale at auction.
- Approach: Offer a low offer in exchange for a quick sale to help the owner avoid foreclosure proceedings, poor credit history and future prospects at owning a home.
- Short sales are a property that is sold back to the lender for less than the amount remaining on a mortgage.
- Approach: The same as a pre-foreclosure, but you may need to get the lender’s approval for the purchase (a process that can take months). Therefore, you should have a preapproval from your lender if you are not a cash buyer.
Sheriff’s Sale Auctions
- A sheriff’s sale auction occurs when the lender has notified the borrower of a loan default, allowing for a grace period for the borrower to catch up on mortgage payments to avoid foreclosure proceedings. The property is auctioned for the lender to recoup the defaulted loan.
- Approach: Look for auctions advertised on the sheriff’s website, local newspapers, and by looking for “sheriff sale auctions” on search engines.
- If a property isn’t sold at auction, it becomes the property of the lender/bank. These properties are referred to as “real estate owned” (REO) properties.
- Approach: Because these homes didn’t sell at auction, you may want to inspect the property’s quality. If it seems manageable, you can get a great deal through sweat equity.
- Foreclosed homes that were purchased with loans from the Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA) are repossessed by the government and subsequently sold by brokers that work on behalf of the federal government.
- Approach: Find opportunities on the website for the U.S. Department of Housing and Urban Development
Why Are Foreclosed Homes Cheaper?
- The home’s possible bad condition (foreclosures are usually sold in “as is” condition)
- Hidden costs such as back taxes and liens, which must first be paid and settled before the buying process can go forward.
- The length of the buying process, including(approval period from lenders and extensive paperwork)
- Competition from professional flippers and other buyers
- Additional savings through reduced down payments, elimination of appraisal fees, avoiding closing costs, and a lower interest rate.
What Makes Foreclosed Properties Attractive for Buyers?
If a property is in the pre-foreclosure or short-sale stage, the original owners don’t have the money to make mortgage payments and may lose the home after a set period.
Also, the sheriff’s office and lenders/banks are not typically in the property management business, so it seeks to unload a property through auctions that can feature drastically reduced prices. Banks want to recoup their lost investments through unpaid mortgages, so they offer a lowered price to entice a quick sale.
Purchasing a Foreclosed Home
If you are a cash buyer, you have a distinct advantage over other borrowers to avoid potential bottlenecks, approval periods, and other obstacles that delay ownership.
If you are purchasing a foreclosure from a bank, you can negotiate the price with a lowball offer for a property. Depending on the bank’s initial investment and the size of its current inventory of foreclosed homes, they may be willing to make a deal to avoid losing money.
For those who are looking for financing options through a mortgage, contact your lender to discuss your plans to purchase a foreclosed property. Because of the risks of a foreclosed property, you may need to provide more information than you would buying a non-foreclosed property.
Government-sponsored financing options are also available for individuals that quality for their programs. The loans come with a number of perks, such as the ability to finance the purchase of the home and any repairs. Choose between:
- Fannie Mae’s HomePath ReadyBuyer program
- HomeSteps program through Freddie Mac
- (Only currently available in the following states: Alabama, Florida, Georgia, Illinois, Kentucky, North Carolina, South Carolina, Tennessee, Texas and Virginia)
- 203(k) Loans
Note that the price of these government loans may be an obstacle for some borrowers. These programs typically carry mortgage insurance and “points”, the upfront fees that typically fall between 1% - 2% of the principal amount of the loan. Also, expect a slightly higher interest rate a quarter of a percentage point higher than most conventional loans. However, for those who can’t find private financing or have the cash on hand to buy outright, these are workable options for those that want to buy a foreclosure.