4 Key Considerations When Buying a Foreclosed Home

For starters, slow down. Patience is your biggest ally when researching your foreclosure options. The steps are relatively simple, and your chances of buying a foreclosed home are real.

Just keep in mind that foreclosure is not like purchasing a regular home. Knowing how to buy a foreclosed home is about keeping things like the following in mind:

Complete Your Due Diligence:

Multiple-listing services (MLSs) have historically kept databases on foreclosures and other homes.[1] Due diligence requires you to look “everywhere.” Banks and other lenders, as they repossess homes, keep files on recent and open foreclosures.

You can search these details online, as many lenders have set up websites that act as directories for these properties. You can visit the websites of many popular banks, such as Wells Fargo, Bank of America and PNC, for their Real Estate Owned (REO) directories. Other online directories include those held by Fannie Mae, the IRS and the FHA.

Once you’re confident regarding your research, talk to a Realtor or agent.

Time the Process Correctly:

It is the pre, current, and post stages of a foreclosure that dictates who owns the property and if you can buy it.

Homeowners who receive default notices are those in the initial stages of a horrible foreclosure.[2] A home that’s “underwater,” which is in the initial stages, gets publicly priced below its mortgage value.

Auctions at county courthouses occur on a routine schedule to sell these properties. Once a property is deemed to be Real Estate Owned (REO), however, you must then contact the lender to see its availability for purchase.

Make a Decision:

Your last step is to decide if the risks are even worth it.

Damaged and badly kept properties, when foreclosed, aren’t sold with new renovations. You’ll often put additional money into foreclosure just to get the property in order, which usually means obtaining a COO (certificate of occupancy)

#1. The Challenges of Buying a Foreclosed Home

The common challenges of buying a foreclosed home stem from the fact that its prior owner was found in default. Your haste may create a sense of embarrassment for them.

Challenges can arise based on their dislike of you or how their neighbors have viewed them. There could be additional obstacles if the homeowner is undergoing a life crisis.

Additionally, you won’t be the only one looking at this property—in most cases.

Some investors deal with a lack of disclosure, which occurs when information is inaccessible, so nothing gets done.

Finding loans to use to purchase foreclosed properties is more difficult than acquiring one for a common house.[3] Taxes aren’t more complicated, but you’re more likely to pay the majority, if not all, of them.

#2. How Buying a Foreclosed Home Works

Buying a foreclosed home is only possible once the process is filed by a homeowner or their lien holder. Here’s a look at the general stages that occur.

First – A Loan Is Given:

Someone buys a home and is confident that they can handle the mortgage. If a lender fails to properly underwrite their applicant, however, mortgages can be granted to those who don’t qualify. Regardless, once the loan is granted, a new homeowner assumes their legal right to live on the property.

Second – The Tenant or landlord Defaults:

Whether it’s due to low income or bad finances, the homeowner starts paying their monthly mortgage late. Late payments turn into partial payments or entire months being skipped.

Four or more months of inactive payments is a full breach of the homeowner’s contract.[4] They’ll receive a notice from their lender regarding their defaulted status. They must make a payment or forfeit their homeownership at this point.

Third – A Bank Seizes the Property:

The lender now finalizes a foreclosure in an effort to reclaim portions of their money back. Sadly, the bank will only get a mild percentage of a home’s value returned to them. The value of a foreclosure is low due to the financial interests involved.

In the pre-foreclosure phase, an owner wants to ease themselves from responsibility and offers a bargain price for a quick sell. Lenders, however, sell foreclosures low because they often don’t want to be in the business of selling neglected homes.[5]

#3. Is Buying a Foreclosure a Good Idea?

Homes in foreclosure make sense when you can manage to receive “instant equity” from them.[5] A home’s value, when foreclosed, can be worth three, four, or eight times more than your purchase price.

Investment properties, those with rentable rooms, make ideal options in foreclosure deals. You can negotiate a good price even when others are bidding. Though you might not be the only potential buyer, competition is relatively low.

#4. Homes in Foreclosure — Foreclosures vs Short Sales

The quickest way to buy foreclosures is to negotiate with the prior homeowner.[6] These are called short sales. During the pre-foreclosure stage, short sales give you an opportunity to see the property.

Once a property is at public auction, for example, you won’t always be able to visit the home to get insights into what you’re buying. When evaluating foreclosures vs short sales, know that for homeowners, the first is mandatory; the latter is voluntary.

It’s important to get approval from the homeowner’s lender in a short sale. Since your costs don’t cover the entire mortgage, any existing deficits are incurred by the owner.

The core difference between short sales and full foreclosures is “the who.” You’ll deal directly with a homeowner in a short sale. You lose negotiating leverage in a foreclosure, however, due to the original lender being involved.

Short sales also happen before foreclosure interventions are filed. Once a lender files a foreclosure, you might be forced out of the deal or must wait for an auction.

Is Now the Time to Buy Foreclosed Homes?

Foreclosed homes provide an excellent opportunity for those creating an investment property. The work you’ll need to put into a foreclosure might only make sense when you have two or more tenants already in mind.

Just expect foreclosures to take longer to finalize than regular home purchases. Some cases take a few months. Other homes need years even when they’re clearly available to the public.

Modern banks are usually not equipped to manage an inventory of foreclosures. A lender’s focus is on collecting interests and issuing more loans.

The good news is that some deals are completed in as little as 22 days. You’ll want to learn more about your profit potential in these cases. For additional information that could help you understand foreclosures, reach out to us with your questions.