You might think that buying a foreclosed home is a complex legal issue. While you need to be aware of certain crucial factors, some aspects are just the same as buying an ordinary house.
Buying a foreclosed home can offer you many benefits since they are often sold below the market value. As a result, you can make low payments throughout the mortgage.
In this article, we’ll cover all the information you need to know about buying a foreclosed home and how to get the best deal on it.
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What Are Foreclosed Homes?
If a debtor fails to make timely payments on the home mortgage, the creditor may be allowed to become the legal owner of the property. This procedure is known as foreclosure, and its purpose is to let the creditor sell the house to recover the unpaid mortgage.
In a home mortgage loan, the home serves as the collateral. This means that if the debtor defaults on the loan, the house can be sold by the lender to recover the outstanding amount.
So if you fail to pay up the loan on time, the lender has the legal right to seize your home. The foreclosure procedure varies from state to state.
In some states, foreclosure can take years to finalize, while in other states, a foreclosure can be done quickly even without going to court.
Foreclosed Homes and Their Kinds
There are two broad classes of foreclosed homes: real estate owned (REO) homes and bank-owned homes.
The lender is the legal owner of both of these foreclosed homes. The lender frequently happens to be a bank in most cases. The foreclosure is in different stages for both of these properties.
When the debtor stops paying mortgage dues to the lender, the lender will try to take over the property using legal procedures. The lender takes the legal route to force the debtor out of the house so that it can be sold.
At this stage, such properties are called bank-owned homes. They will eventually be auctioned so the lender can recover the outstanding loan.
An REO home, on the other hand, is a foreclosed home that remains unsold even after undergoing an auction. The lender still has ownership of the unsold foreclosed home.
Since the lender is in a hurry to sell off the property to recover the loan amount, the foreclosed property price will probably be less than the market value. This is the crucial reason why people are interested in taking up a foreclosed home.
However, this advantage may be offset by the amount of repair and renovation work that may be needed to restore the property.
How to Get a Good Deal on a Foreclosed Home
Before looking through REO listings or bidding at foreclosure auctions, you should ensure that you will be approved for the mortgage. Although buying with cash is the best way of purchasing property, many people don’t have the means for such a significant upfront cash payment.
You will likely need a loan to buy the foreclosed property. Before diving in, you need to pre-qualify and get a pre-approval.
With the pre-approval, you will know about the mortgage rates and conditions before sending an offer for the foreclosed property.
The good news is that you can use a different bank or lender than the defaulting debtor since your loan is a separate transaction. You can contact a mortgage lender who knows about foreclosure financing.
For this, I recommend using LendingTree. LendingTree is a mortgage marketplace that connects you with other mortgage lenders. When dealing with a foreclosure, you really want to make sure you have a good lender, so using a service like LendingTree will help you compare a variety of lenders at once before making your decision.
If you’re looking for a direct lender, I recommend SoFi and Reali Loans. Both have excellent options for new home purchases and refinancing, and offer competitive rates.
If you prequalify, you can obtain a pre-approval letter from the lender. This letter will detail the credit that is available to you based on the lender’s comprehensive evaluation of your earnings, credit rating, and financial history.
This letter is proof that you’re a serious buyer who has strong financial backing for the foreclosed property deal. It separates you from mere onlookers who have no intent beyond a passing interest in the property.
Get in Touch with a Real Estate Agent
If this is the first time you’re buying a foreclosed property, you should enlist the services of a real estate agent experienced in REOs. You should not avoid real estate agents on account of their fees in this situation.
The fee is a small price to pay for saving yourself from the potential frustration, regret, and monetary losses that can come with inexperience. Don’t try to do it on your own unless you’re sure about what you’re doing.
You should aim for real estate agents who are qualified and experienced concerning foreclosed properties. You should look for certificates like the Short Sales and Foreclosure (SFR) as well as the Certified Distressed Property Expert (CDPE) designation.
Since agents and mortgage brokers have extensive experience in the real estate and mortgage fields, they are in an excellent position to guide you towards suitable properties.
Before settling for a real estate professional, do your research and find out as much as you can through testimonials, past clients, reviews, and track record.
Avoid working with a bank’s real estate agent, no matter how enticing their offer is, since they may suffer from a potential conflict of interest.
And don’t forget once you get into a foreclosure, you’ll probably need to do some work. Prosper is an excellent resource for this, as you can get a loan through peer-to-peer lending. LendingClub is another option that I would recommend you look into.
Find the Best Personal Loan for You
Determine the Right Price
Your real estate agent will perform a comparative market analysis to determine the actual worth of the foreclosed property. This involves comparing the selling prices of similar properties to know the market value of the foreclosed house.
The agent will utilize data from the previous 5 to 6 months to understand how quickly similar homes are selling and for what price.
If houses in the area are selling fast, then you may need to give a reasonable price offering to seal the deal. If others are also bidding on the property, then your offer must be competitive enough to interest the bank.
Finalize the Deal
Your real estate agent will work in your favor while negotiating an REO deal. Another way to do it is to bid at an auction, but you should do it only if you’re well-versed in foreclosure auctions. You should place an offer that is within your budget.
Therefore, take help from your real estate agent while making a budget to include all expected associated costs at the right amount. There should be room in your budget for added expenses, such as renovations, repairs, property taxes, insurance, closing costs, and inspections.
You can find out about foreclosure auctions through local newspapers, court, and city hall. Your real estate agent will be most helpful in this regard.
Inspection and Lien
After you place an offer, you have a limited time within which you can conduct an inspection. Under some circumstances, you may be allowed to inspect the property before making an offer. Inspection fees can go up to $800. This depends on the options that you have chosen.
For foreclosed homes, you should get a complete inspection that includes checks for radon levels, termites, as well as water line and sewer assessments. It is best to find out as much as you can about the foreclosed home before moving in with an offer.
Keep in mind that the foreclosed property can have multiple liens due to different loans that the debtor received. Contact a title company to sort out potential conflicts and liens before you proceed with your loan.
If everything goes well, then you can close the deal and become the owner of the foreclosed property.
Repair and Renovation
After you have finalized the purchase of the property in question, you can begin renovation work. Extensive restoration and renovation work needs to be carried out on foreclosed properties to make them code-compliant.
You may have to work on different aspects of the property like foundation work, roof replacements, plumbing repairs, and electrical upgrades.
With a thorough inspection, you will be able to uncover most of the work that needs to be done. After all repair and renovation work is over, you can move into your new property.
Buying a foreclosed home may not be easy, particularly if you’re new, but if done right, it can save you a great deal in the cost of homeownership.
Further Issues That You Should Be Aware Of
If you’re planning to utilize government loans for purchasing a foreclosed home like a USDA loan, VA loan, or an FHA loan, then you should fully understand the requirements of these loans.
To obtain government loans for such purposes, you must be sure that the property meets a certain minimum standard.
This means that the property will have to be in reasonably good shape. You can’t get government loans for decrepit and dilapidated properties.
Before hunting for a foreclosed property, you should understand what your budget is and how much you can afford. You can adapt your expectations accordingly.
Since buying a home is one of the most expensive transactions that you will ever make in your life, you should get in touch with a financial advisor like Paladin, in addition to hiring a real estate agent.
An experienced financial advisor can help you to understand all the potential pitfalls and drawbacks associated with foreclosed properties. You should consult with your financial advisor to find out if you’re getting a good deal or not for the foreclosed property.
Another thing you need to make sure you think about is homeowners insurance. While it might be less expensive to buy a foreclosure, your insurance may be higher. Before you go with the insurance provider you’ve always used, I recommend using Policygenius, which is a marketplace that connects you to multiple homeowners insurance providers so you can get the best possible policy and rate.
Another company I love is Lemonade–which just recently started offering homeowners insurance. Their quote and policy process is so fast, and it’s done through AI. Their customer service is excellent as well. Definitely give them a look, too.
Problems with Foreclosed Properties
Buying something below market value sounds appealing, but shrewd buyers know this is a potential cause for concern. If you’re being offered something below market value, then you should think twice about why the seller has dropped the price.
Foreclosed properties sell for less than the market price because they often have several problems. Since the previous owner was unable to make timely mortgage payments on account of financial difficulties, there is a high likelihood that the foreclosed property is not well-maintained.
Foreclosed properties commonly suffer problems like pest infestation, water damage, and structural issues.
As you would expect, expelling someone from their home and seizing their property to sell it off can be a bitter matter. Sullen and disgruntled ex-owners can take out their frustration by damaging the property.
Quite often, they take appliances and fixtures along with them. After the previous owners have left, the property may be left on its own and open to vandalism and criminal activity. Squatters may even occupy the house during this time.
Foreclosed properties could be in poor condition if the previous owner was too financially distressed to maintain it properly. The property may also become derelict and dirty as a result of sitting idle following the eviction of prior owners.
You may also have to contend with poorly done or incomplete renovation–it is possible that the previous owner fell on hard times and had to give up the property upgrade halfway through.
There will likely be no electricity in the house since it has been unoccupied for months. It will be harder for you to inspect windowless areas and basements in particular.
Be very careful about any code violation notices issued by the authorities. If the violation has not been corrected, not only will you have to carry out rectification at your own expense, you may also have to pay hefty fines.
Inspect the house thoroughly with certified professionals so that you know about possible property code violations that you may have to correct on your own in the future. These are all hidden costs that you should be fully aware of.
All of this suggests you really should have some emergency money set aside. Chime Bank not only allows you to get your paycheck up to two days early, but it has no fees, and it has an automatic savings feature.
For example, every time you make a purchase, Chime can round up to the next highest dollar amount and put the difference into a savings account for you. While it may seem like nothing, over time it adds up, and when you run into an unforeseen circumstance like I mentioned above, having some extra cash on hand never hurts.
Read More: Chime Bank Review – Fee-Free Banking
Buying a foreclosed home can be an amazing investment, but only if you’re smart about what you’re doing. If you’re inexperienced, follow the advice above, but make sure to hire an experienced agent who knows how to buy foreclosures.
You’ll also want to start vetting contractors for the work that will more than likely need to be done on the property. It can take an unusually long time to find a good one–so if you’re serious, start sourcing now.