Many people dream of buying a home but it can be difficult because it’s so expensive. In addition to a monthly mortgage, you also need to come up with a down payment and cover the maintenance and upkeep that comes along with being a homeowner. For many, this dream seems out of reach, that is, until they consider buying foreclosed homes.
Luckily, there are ways to afford a home even if you may not think so based on your bank account. Buying a foreclosed home is one of the most affordable ways to invest in real estate and get a home of your own.
Before buying a foreclosed home, there are several things to know about the process. While this is a great option for many people who want to be homeowners, it might not be right for everyone.
Benefits of Buying a Foreclosed Home
First, it’s important to understand the benefits of buying a foreclosed home.
The primary benefit is the amount of money you save. Most data shows that the average savings on a foreclosure are nearly 30 percent. Some areas offer discounts ashigh as 40 percent. This is a significant savings when buying a home. Not every foreclosure has a discount this drastic. You still need to find a home that suits your needs and won’t end up being a money pit long-term.But if you’re looking at homes in the $300,000 range with a 30 percent discount, you’d be looking at paying around $210,000.
What is Foreclosure?
Now that you understand why a foreclosure might be a way to get the home of your dreams, let’s look at how the process of foreclosure works – what happens both before you buy the home and when the home is sold to you.
The details of foreclosure vary from state to state, but, generally, a foreclosure occurs when the existing homeowner stops making payments the mortgage. Eventually, the bank takes action and forecloses. This process eventually forces the homeowner to evacuate the home and the bank takes possession of it. At that point, the bank either sells it at auction or lists it for sale as a bank-owned home.
The most important thing you can do before buying a foreclosed home is to familiarize yourself with how it works in your state. The more you know about the process, the better.
There are several stages to most foreclosures leading up to the point when the home is available for purchase. The states of foreclosure include:
Pre-foreclosure Short Sale
This occurs before foreclosure has officially taken place but when the situation is heading in that direction. The homeowner is struggling to make payments and, if they owe more than the value of the home, the sale is referred to as a short sale. Selling the home is not enough to cover the balance of the loan – it’s “short” of what they owe.
Once a foreclosure has taken place, the bank has the option of selling the home at auction. Banks have no interest in owning homes and want to get rid of foreclosed homes as quickly as possible. Banks usually try to sell these homes at auction if they think there’s enough demand in the area.
If the home does not sell at auction or the bank chooses not to attempt an auction, a foreclosed home can be put on the market as a bank-owned or REO (real estate owned) home. Buying a bank-owned home typically costs more than buying a home at auction but can still be significantly cheaper than a traditional sale.
Many real estate experts advise people considering buying foreclosures to choose a bank-owned home but, if you’re willing to invest time and effort into learning foreclosure buying strategies, you can be successful purchasing any type of foreclosure.
Remember, banks do not want to negotiate when selling a foreclosed property. They don’t want to give away homes but they also don’t want to invest resources into selling these properties. Trying to low-ball the bank or playing a haggling game is unlikely to benefit you. The odds are more likely that you’ll miss out on the sale because someone else will give the bank what they are asking since it’s already below market value.
Step-by-Step Guide to Buying a Foreclosure
Now that you understand the foreclosure process and understand the benefits of buying a foreclosed home, let’s take a look at the process of buying a foreclosed home.
1. Do Your Research
As we mentioned, you need to understandthe foreclosure process in your state and monitor foreclosure activity in your target community. The sooner you know about a potential foreclosure, the sooner you can act to make the purchase.
Foreclosure properties generate a competitive market that moves quickly so you need to stay on top of things. If you don’t have time to keep track of all the foreclosure activity in your area – and most people don’t – you can use a foreclosure tracking service to do it for you. Many not only notify you when a foreclosure comes on the market, but they also give you information about pre-foreclosure listings. If you don’t want to enroll in a service, you can get the information from local officials.Whatever you need to do to stay on top of the market helps you find the best property in the long run.
2. Work with an Agent Who is Familiar with Foreclosures
Working with a real estate agent can save you time and money and it’s especially helpful when buying a foreclosure. You must work with an agent if you’re a first-time foreclosure buyer.
Some agents don’t like working with foreclosures while others are willing to do it when the need arises. There’s also a type of agent that specializes in foreclosures. This is who you want to hire. They are experienced with the process and understand the laws and procedures. Let your agent know upfront that you are interested in foreclosed properties so they look for the right homes for you.
3. Compare Sales
It’s always important to consider “comps” when investing in real estate but it can be especially helpful when buying a foreclosure. If you’re buying a bank-owned property, it helps you make a smart offer on the property. You don’t want to low-ball but you also don’t want to pay too much.
You’ll also get a good indication of how quickly you need to move on the property, which, with most foreclosure listings, is pretty fast. Knowing what the comparable sales in an area are before a foreclosure is even listed helps you save frustration when it’s time to make an offer.
Most foreclosed properties are already priced below market value. If the bank has priced it higher, it might be a good idea to avoid the property. Why pay more than you need to?
4. Make Sure You’re Considering the Full Cost of Buying the Home
It’s common for foreclosed properties to be in some state of disrepair. A homeowner struggling to keep up with mortgage payments probably could not afford to maintain the home. In some cases, homeowners become frustrated and completely neglect the property because they know they’ll be forced out soon.
There are even instances in which homeowners intentionally damage the property before they leave. This is why it’s so important to evaluate the condition of a foreclosed home before making an offer.
Foreclosures are sold as-is. This is one of the primary deterrents to buying one. Yes, you get a great deal on the purchase price but you could end up paying more than the market value if you need to invest tens of thousands of dollars in repairs and updates.
Most foreclosure buyers are willing to invest some money and time into repairs because they’re still getting a great deal overall. But it’s important to know what you are getting before finalizing the sale. Chances are any repair requests submitted mid-purchase will not be honored by the bank.
An experienced foreclosure agent can help you make an assessment of the situation and determine how to proceed with your offer.
5. Submit Your Offer
If you’re comfortable with the condition of the property and you know you’re getting a reasonable price, it’s time to make an offer.
If you are not paying in full for the property, get pre-approval from a mortgage lender before making an offer. Include information about your pre-approval with your offer so the bank selling the property knows you’ve secured financing. You shouldn’t let the listing bank make decisions about your qualifications for buying the home.
Buyers with pre-approval always tend to fare better because they have more purchasing power. They are considered lower risk and any seller is likely to choose a buyer with pre-approval than one without unless someone is offering to buy to home outright.
Bank Offer Instructions
In most cases, the listing bank provides instructions for submitting your offer. Make sure you follow these instructions when you submit and work closely with your agent when putting your offer together.
Expect a bidding situation to arise. As mentioned, foreclosure sales are competitive so the better your offer, the better your chances of being chosen because the bank will likely choose the highest offer in the end. Sometimes, banks even let buyers know there are several offers to drive up the price.
This is why it’s so important to know the actual worth of the home based on the current market and how much you can afford.The last thing you want is to get caught up in a bidding war over foreclosed homes and end up paying too much for a foreclosure property.
Should You Buy a Foreclosed Home?
Buying a foreclosure is a great way to get the home of your dreams. Because banks are willing to sell cheap to get rid of these homes, you might be able to afford something that’s original value was out of your price range. But whether or not you should buy a foreclosed home depends on a variety of factors, including your financing situation, risk tolerance, and personal preferences. Some people just aren’t comfortable buying a foreclosure no matter how great of a deal it might be.
If you aren’t sure if buying foreclosed is for you, let your real estate agent know you’re open to it and see what happens. If your dream home is listed as a foreclosure, you can decide then if you want to move forward with the process.
What about Cash Buyers?
There are plenty of foreclosed homes that are purchased by investors who have the resources to pay cash and, typically, these buyers are favored by the bank because the deal closes quickly and with less risk. Don’t let this dissuade you, though. Just make sure your offer is competitive and that you are prepared to lose out if someone outbids you. If you’d like to know more about buying foreclosed homes or you are ready to begin the process, sign up for our email list!