Buying A Foreclosed Home
During the last housing market crash of 2007-2008 home foreclosures nearly tripled, as this 2009 article from CNN Money reports. Real estate investors stepped into the market and scooped up foreclosed homes for much less than what the owners had originally paid. They turned them into rental homes and, when the housing market improved, investors sold them for substantial profits.
buying a foreclosed home
What happens when you find a home in the perfect location and within your price range, but it's a foreclosure? Foreclosed properties may work well for the budget-minded buyer willing to take on any added repair costs. Before you proceed, learning more about the pros and cons of buying a foreclosed home can help ensure this is the right move for you.
Homes enter the foreclosure process when the owner can't meet their mortgage obligations. If a homeowner falls behind on payments, the bank may agree to what's known as a short sale. This occurs when the seller uses the money they receive at settlement to repay their mortgage loan. The bank typically agrees to accept these proceeds as satisfaction of the mortgage.
Rather than agreeing to a short sale, the bank may move forward in the foreclosure process and assume ownership of the house. At that point, the house may be sold at auction, added to a foreclosed homes website or listed with a real estate agent.
The main advantage of choosing a foreclosed home is a lower sales price. Foreclosures give buyers an opportunity to purchase a home below the average market value. Banks generally aren't interested in holding on to foreclosed properties, which tends to make them motivated sellers.
Foreclosed homes might need varying levels of work before they're move-in ready, because they're sold in as-is condition. Buying a foreclosure is one possible option for buyers stretching to find a home in a location where prices are otherwise out of their budget. You can also save money if you're willing to do some of the repair work yourself rather than pay a contractor.
Foreclosed homes may be sold at auction, or they may be listed for sale by a bank. Purchase terms for foreclosures can be fairly rigid and often are non-negotiable. In some cases, you may not be able to do a walk-through of the home before an auction takes place. If you plan to participate in an auction, you'll need to provide an upfront deposit. If your bid is accepted, the house will generally need to be paid for with a certified check or in cash.
Foreclosed homes that aren't sold at auction may be referred to as real estate-owned, or REO, properties. When you buy a home owned by a bank, financing options are similar to a traditional home purchase, and you can secure a mortgage loan. If you prefer to work with a real estate agent, ask them about their knowledge or experience in foreclosures.
Foreclosed home purchases can turn into labor-intensive endeavors, and they won't be the best option for every buyer. These homes often attract those who enjoy the work of remodeling or renovating a property and have the necessary cash to spend on repairs. Investors may also look to buy foreclosures at affordable prices and flip them or turn them into rental properties. They may also be a good choice for those who want to move into a certain area but need to stretch their budget.
If you're thinking about a foreclosure, research recent sales of non-foreclosed properties to make sure you're really getting a bargain. A real estate agent who has experience with foreclosures can advise you on property values and assist with price negotiations. When you're considering the pros and cons of buying a foreclosed home, you'll need to carefully weigh your personal needs and wants against your finances before deciding what works best for you.
You don't have to know a lot about real estate to know that a motivated seller can mean a lower price for the buyer. But buying a foreclosure can be unpredictable and risky, and it takes flexibility and patience. Learn the upsides and downsides of buying a foreclosure, where to find them and how to know whether you're getting a good deal.
From a purchaser's perspective, foreclosure has three distinct stages: pre-foreclosure, auction and post-foreclosure. Homes can be purchased during any of those three stages. During the pre-foreclosure period, you are purchasing from a struggling homeowner trying to fend off foreclosure. In the other two stages, you are working with a bank that has wound up with a property on its ledgers instead of a mortgage. The home's location, the reason it's in foreclosure and where it is in the foreclosure process all affect a buyer, because these details confer certain rights on the homeowner, and create potential complications for the prospective sale.
And the risks are there. First and foremost is property condition: If the previous homeowners weren't able to make mortgage payments, there is a good chance they deferred home maintenance too. For properties that have been abandoned for a period of time, there may be leaks, problems with mold and vandalism, sometimes from the resentful prior owner. Those repair costs can be massive.
Other problems that may affect your bottom line revolve around laws in your jurisdiction. You can have problems getting tenants, squatters and even the previous homeowner out of the property. In judicial foreclosure, the former owner is generally evicted as part of the court judgment but in nonjudicial foreclosure, the lender or purchaser of the home might have to get a separate Notice to Quit or file eviction proceedings. That means time, attorney's fees and possibly new property condition issues. Sometimes a buyer will propose a cash-for-keys deal, essentially paying the previous owner to leave and to do so nicely.
Another related issue is the right of redemption, explains mortgage lender Rocket Mortgage by Quicken Loans in its guide to buying a foreclosed home. You may go to the trouble of buying a home to have to turn around and sell the property right back to the former owner. This right exists up to the point of sale in all states, and even for a period after auction in some states. Additionally, in states with this right after auction, sometimes the previous homeowner can legally remain in the property during the right-of-redemption period.
Realizing that some of these pitfalls are largely issues with auctions and REOs, pre-foreclosure purchases start seeming pretty attractive: You are able to know the most about the property history and it has a higher likelihood of being in good condition. But foreclosure is a series of steps, not a one-day event, and during the pre-foreclosure period, the homeowner often has months to rectify his or her situation, meaning you spend time, effort and often cash working toward a sale that may not go through.
Are you buying the home as an investment property or to live in? If you're considering the property as an investment to flip, start with the 70% rule. This commonly used guideline says to calculate 70% of the total price the home could sell for once it is fixed up, and then subtract the repair costs. That amount is the most you should pay. Obviously, making this calculation is difficult if you can't inspect the property because you may have only a glancing notion of what you're getting into for the repair bill. Err on the side of caution.
You could save a lot of money. A major perk of buying a foreclosed property is the savings. In terms of a foreclosure, the lender is strongly motivated to sell the home, giving the buyer a strong negotiating position.
Needed repairs could give you an opportunity to customize the home. If the house were perfectly move-in-ready, spending money on renovations may feel wasteful. But if you already have to make some repairs, spending a little extra to get exactly what you want may be worth it.
Buying a foreclosed home can be a long process. Purchasing foreclosed properties generally involves more paperwork. The average foreclosure process during the second quarter of 2022 took just under three years, according to ATTOM Data Solutions.
A foreclosed home can have hidden debts. Foreclosed homes can have outstanding taxes or unpaid liens on them that new owners will have to pay. The exception to this are REO homes. A title search should reveal if there are any issues, and title insurance will protect you from any new ones.
Some owners will sell their homes before their mortgage lender can start the official foreclosure process. Owners generally have 120 days (about four months) from their first missed payment to find a solution. Selling the house for enough to cover what they owe before the deadline can save their credit.
Buying a foreclosed home can be a good way to score a deal while hunting for real estate. A foreclosure is a house whose owners were unable to pay the mortgage or sell the property. As a result, the real estate lender assumed ownership and is now trying to sell it to recoup some of its costs.
A home in pre-foreclosure is one where the current owners have defaulted on their mortgage payments and have been notified by the lender that within a relatively short period of time they must either sell the home to pay off the mortgage or get back on track with their monthly payments.
Owners of pre-foreclosed homes may not yet be aware that their home has been listed on one of the many websites where you can find out about these homes. The information comes from public records that show the owner is in default. They may be embarrassed about their circumstances and harder to approach.
Buying a foreclosed home is one-way potential homeowners can save a bit of money. This is because a foreclosed home is likely to be selling for cheaper than other homes on the market, so you may be able to get a good deal and keep your mortgage payments lower. While there are a few things you should know about buying a foreclosed home, for the most part, the process is very similar to buying any other real estate. For help working a foreclosure purchase into your financial plan, consider working with a financial advisor. 041b061a72