Over the years working as a real estate agent many buyers have asked me how to buy a foreclosure. The appeal is that they’ve heard they are the bargain of the century.
If you are considering buying a foreclosure, it is important to do your homework before you make an offer on a property and put up your earnest money. Foreclosures can certainly be a great deal – but they are not always as much of a bargain as people assume they will be.
Buying a foreclosure also requires going through a slightly different process than you would be purchasing a home from the average homeowner. There are certainly pros and cons to buying a foreclosure. In the end, buying a foreclosed home can be very rewarding, but only in specific circumstances.
Buying a Foreclosure – What You Need to Know
What exactly is a foreclosure?
Most homebuyers take out mortgages from lenders to purchase their homes. Some of those buyers are unable to keep up with their mortgage payments. If they get far enough behind, the bank will take back the home, or foreclose on the homeowner. The bank doesn’t want to own the home permanently, though. It wants to get as much money as it can for the property – as quickly as possible – so that it can move on and get back to lending.
The fact that the lender is a highly motivated seller – one that wants to sell fast and is willing to negotiate – works to your advantage. You can often get a home for less than its market value when buying a foreclosure.
You can also usually expect the lender to be willing to work with you on the price, something that may not be as likely with a regular homeowner.
Unlike the average homeowner, the bank has no personal attachment to the property. It is interested in selling, it is well aware of market value, and is often so motivated to sell that it will sell a foreclosure for less – sometimes significantly less – than that market value.
Understanding The Three Types of Foreclosures
Did you know there are three types of foreclosures? There is what’s known as a pre-foreclosure or short sale, an auction foreclosure, and a bank-owned foreclosure.
You could call these before, during, and after foreclosure takes place. Let’s break down each of these foreclosure scenarios.
Pros and Cons of Buying a Foreclosure
What are the pros?
Without a doubt, there are advantages and disadvantages to buying a foreclosure property. On the upside, it is possible you’ll be scoring a great deal. Don’t, however, automatically assume that is the case. One of the mistakes real estate investors make, along with the general public, is purchasing foreclosures at or above market value.
The goal in buying a foreclosure should be to purchase at least slightly under what the market value would be. In many circumstances, it’s possible to achieve this as the bank is just looking to get the asset off their books.
Usually, you’re able to close very quickly with a bank-owned foreclosure. There are no underlying personal timing issues that are found in the standard homeowner transaction.
You will also be able to do a home inspection. However, don’t expect the lender to make repairs – they rarely ever do. With a bank-owned foreclosure, the house will also be vacant, which will make it easier to see any deficiencies. Traditionally bank-owned homes are listed with real estate agents who must disclose any defects they discover.
What are the cons?
When you buy a bank-owned foreclosure, you’re purchasing the property with all its worts.
- Banks seldom make repairs.
- You will be purchasing the house as-is.
- Some lenders will require you to sign additional paperwork outside the norm.
Lastly, the bank has never lived in the property and therefore won’t have any intimate details that otherwise might have to be disclosed. When purchasing a foreclosure, it ramps up the importance of doing thorough house buying due-diligence. Numerous people have regretted their decision to buy a foreclosed house.
Buying a Foreclosure in 5 Easy Steps
1. Team up with a real estate agent who knows how to buy a foreclosure.
With so many real estate agents out there, it is crucial to look for one who meets your needs. Some agents are more experienced with foreclosures than others, making them a better choice when you are attempting to purchase a home from a lender.
There are actually certification programs that real estate agents can go through to learn more about buying foreclosures, certifications that you can look for when choosing an agent.
Keep in mind that experience is everything when buying specialty real estate. You’ll want to feel confident your agent knows their way around the foreclosure buying process.
Whatever you do, don’t use the real estate agent that works for the lender to purchase a foreclosure! The listing agent represents the seller, NOT you. By going directly to the listing agent, you could be setting yourself up for dual agency, whereby the agent becomes a neutral party.
In dual agency, you cannot get any of the typical buying advice you would expect from a buyer’s agent, including what to offer. Here are all the reason why having and agent is essential. By having a dual agent, you have NO representation! Lots of real estate agents practice dual agency and will try to convince you there are no issues with it.
There is only one person who benefits from dual agency – the real estate agent. Don’t be suckered.
Once you choose the right agent, you can decide what types of foreclosures you are interested in looking at and let the agent guide you through the process. Just remember, foreclosures are often snapped up quickly by investors, so you will need to be ready to move fast when your agent finds a potential deal.
2. Get your finances in order – which includes getting preapproved for a loan.
Because the process of buying a foreclosure can move so fast, you need to have your financial situation in order to make a deal as soon as possible. That means getting preapproved for a mortgage before you start looking for foreclosures to purchase. That is unless you can pay cash for a property. But if you are like most buyers, you will need a loan to buy a home.
Remember, a mortgage PREAPPROVAL is not the same as PREQUALIFICATION LETTER. It is relatively easy to get prequalified, but getting preapproved is much more involved.
You will need to provide the lender with numerous documens before being approved for a mortgage.
A preapproval letter is more useful because it is more detailed – it tells you just how much money you can borrow and pretty much guarantees you can get that money to buy a home as long as your financial situation doesn’t change before the purchase. Sellers like to see buyers with preapproval letter because they know that those buyers are ready to make a purchase.
3. Let your agent compare the prices of other similar sales before making an offer.
One of the significant advantages of working with an experienced real estate agent is that you can make more knowledgeable offers for properties. It is vital to make an excellent offer so that you are taken seriously – and to avoid offering too much for a property when you don’t have to.
Your agent can help you determine the right offer by running ‘comps’ or comparables for similar homes in the area.
Real estate agents can run a comparative market analysis to see all the homes that have sold in the area in a specific time frame. They can include all the information relative to the home you are making an offer on to ensure that the prices you look at are for properties comparable to the one you want to buy.
That way, you can make an offer that is likely to be appealing to the lender but also one that is not too high.
4. Make sure your offer is competitive.
Depending on where you are buying, foreclosures may be selling quickly and for reasonable prices. You have to adapt to the market conditions as a buyer, so that means you may need to offer a higher price than you think to compete with other foreclosure buyers.
Your agent can give you an idea of what price is the right price. You want to make a strong offer so you can land the sale – if you offer too little, the bank might not take you seriously.
It is worth remembering that foreclosures are often priced competitively from the outset. Banks are not sentimental about foreclosures. They want to sell them as fast as possible. If you offer too much lower than the initial price, you could lose out on the purchase. Work with your agent to decide which price makes the most sense based on current market conditions.
5. Know that foreclosures are offered ‘as is’ and act accordingly.
Foreclosures can be great deals, but they can also be nightmares if you are not careful. The bank is trying to sell the property as it is. Unlike a regular homeowner, the bank is not usually willing to make repairs or other fixes to the property before they sell it. That means you could wind up with a disaster if you are not careful before you buy it.
Always get a foreclosure inspected by a home inspector before you hand over your money. You want to know that the home does not have any issues that will be prohibitively expensive to fix after your purchase.
You do not have to get a home inspection, but your agent will advise you to regardless. You want to be sure that things like the foundation, electrical system, plumbing, and roof are in good enough shape to justify the purchase. Otherwise, you could spend more making the home habitable than you would have from just buying from a regular seller.
How to Find a Foreclosure Before They Hit The Market?
Lots of prospective home buyers ask the question, “is there a way to find out about foreclosure properties before they hit the market?” Well, there is a way to potentially increase your odds. A company called Realty Trac publishes data of homeowners who miss mortgage payments.
In most circumstances, these people have run into a short term financial crunch. They miss their mortgage payment but eventually get caught up. It is worth checking though, as a few will slip through the cracks or are excellent candidates to short sale their home.
Hopefully, you now have a better understanding of how to buy a foreclosed home. Remember to enter these kinds of real estate transactions with your eyes wide open. It is advisable to have a team of professionals to consult with when essential questions come up. Always do any necessary due diligence when purchasing a foreclosed property.
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