Beginner's Guide to a Foreclosed Home Purchase

Industry Observer with LendingTree

Prospective investors and home flippers alike are drawn to foreclosed homes like fireflies to a lamp-post. The discounted prices on these properties are very attractive to speculators looking to make a quick buck, but they are not without risk. Foreclosed homes often suffer from poor maintenance, and the expense of repairing them may cause more headache than they're worth, especially if you intend to do the work yourself. Before making an offer on a foreclosed home, decide if you're willing to go through through a cumbersome purchase process, for a questionable, abeit, aggressively priced home. 

How to Buy a Foreclosed Property

The process for buying a foreclosure will differ from your standard single-family home purchase. Be sure to search for "auction homes" or "homes in foreclosure" in your internet search. You can also browse real estate listing sites like Zillow or Redfin, but keep in mind that these may not contain all the available listings in your area.

Another place you can identify local foreclosures are the public records at your county courthouse. Local newspapers often print foreclosure listings repossessed by government agencies or private lenders. A good example is Fannie Mae's HomePath program, which not only lists foreclosures, but helps prospective homebuyers apply for financing on the property in question. 

If you're having trouble finding foreclosures in your area, you can also seek the assistance of real estate agents who specialize in foreclosed properties. These professionals will have access to hard-to-find listings in your area, and may be connected to a network of contacts, willing to work with foreclosed properties. They can also provide useful advice when it comes to buying a foreclosed home.


How Does Buying a Foreclosed Home Differ From Buying Any Other Property?

Most foreclosed properties are already priced to sell, which means that there's little-to-no room for negotiation. They're also sold "as-is," which means that the buyer will be entirely responsible for any defects they find. The majority of foreclosed listings will require you to either have a preapproval letter in-hand, or require a cash-buyout. 

How your closing process goes and the final price you pay, will depend on the stage of foreclosure proceedings when it's put up for sale. Below is a brief outline of the different phases in the foreclosure process:


This is the first stage of foreclosure, and can last anywhere between 3 to 10 months. During this phase, the bank has already issued a default notice to the homeowner, notifying them that the property will be seized if the outstanding debt is not promptly repaid. This period does not necessarily end with the bank seizing the property, as the homeowner still has leeway to make up their late payments or attempt a short sale


Auction/Foreclosure Notice

If the homeowner fails to remedy the default, the bank will sieze the home during this phase and begin proceedings to auction off the proprerty. The property will become available for sale and will usually sell quickly. The majority of foreclosed properties see their lowest sales price during this stage. So would-be investors would do well to be especially attentive to properties in this phase.


Real Estate Owned (REO) Property

If the property fails to sell at auction, the home will then fall under ownership of the bank, which will list the property for sale. While REO properties may be listed at below market value during this stage, the pricing likely won't be as aggressive as it was during the auction phase. Properties in this stage may have fallen into disrepair due to negligence.


Regardless of which phase the property is in, the purchase of the (soon-to-be) foreclosed property won't be a standard transaction. The bank will usually have procedures in place, unique to foreclosed property sales, and they may be adjusted based on the scenario they're faced with.


What do you Need to buy a Foreclosed Property?

Banks are usually reluctant to finance the purchase of foreclosed properties. Unless you have enough money for a cash-buy out, you'll need to secure financing before you even start looking for a home. Foreclosed properties tend to sell quickly, and getting pre-approved for a loan will maximize your chances of closing a deal.

Mortgages for foreclosed properties will entail strict requirements due to the increased risk involved. It's a good ideal to obtain a copy of your credit report and scrub it for any errors. Make sure that your credit score is as high as possible before even approaching a lender. It's also a good idea to minimize your debt-to-income ratio. If possible, seek the full approval of the lender on your requested mortgage, as this could give you more negotiating power when making an offer.

Keep in mind that the bank in possession of the foreclosed property is unlikely to finance the purchase due to internal underwriting policies. You will likely be required to rely on other sources of financing when approaching them. 


Is Buying a Foreclosed Home a Good Idea?

You can still get a good deal on a foreclosed home, in spite of all the hurdles you'll need to jump through to close the deal. The corporate owners of foreclosed homes will usually aggressively price these properties to recoup their losses, as banks have little interest in the long-term ownership and maintenance of neglected homes. The longer they hold onto the property, the more money they lose.

Nevertheless, expect lots of competition from other speculators as well. As the law of the market goes, no obvious advantage goes unexploited for long. If you don't have the funding available when you make an offer, the seller may choose to move onto another buyer who does. Any contingencies you demand may derail your purchase, so make sure you identify the risks you're facing before submitting an offer. 

Finally, foreclosed homes that have been on the market for a while may fall into significant disrepair, either from a lack of maintenance, vandalism or even the errant squatter who's broken in. Keep in mind that there may be outstanding liens on the property that the homebuyer may get stuck with; it's therefore important that you retain competant legal counsel to help you navigate through potential landmines. 

The average homebuyer isn't willing to take on the risks of a foreclosed home. If you're inclined to do the extra research and make the necessary renovations, you may very well realize profits down the line. The key factor here is to do your diligence in advance to minimize the chances of a major headache.




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