Searching for any new home can be a stressful situation, today there is an influx of buyers in the foreclosure market as they expect to find a great deal on an amazing house.
However, without doing the proper homework, buying a foreclosed home could lead to far more heartache than it should.
A buyer has to go into this process with a little extra knowledge, and a little more long-term vision.
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What is a Foreclosure?
A foreclosure happens with a homebuyer stops making their mortgage payments. Usually after a period of 3-4 months past due a bank will file foreclosure paperwork.
The homeowner is then forced to leave the property and the bank takes possession of the home. The property is then listed as an REO (real estate owner) property for sale directly by the bank.
A pre-foreclosure is when a property is still owned by the homeowner is late by 90 days or more and is expecting to be foreclosed on soon. A pre-foreclosure is not necessarily a short sale.
A short sale is when the homeowner is asking their lender to accept less than what they owe in order to sell the home. Short sales are much different than your typical home buying process.
If you submit an offer on a short sale the owner needs to take your offer to the bank to find out if they’re willing to accept the sale. It can take several months to find out if your offer is accepted which can scare off most potential buyers.
Reasons Homeowners Get Foreclosed on
- Loss of income, fired from job, or unemployed
- Medical conditions not allowing borrower to earn income
- Large debt and other bills that have overwhelmed the homeowner
- Divorce and other legal issues
- Unable to pay HOA dues
5 points to keep in mind:
- Foreclosures are sold as-is
- A loan approval letter should be your first step
- Find a real estate agent that is on your side.
- Know the neighborhood, and what comparable homes are going for.
- Know your budget
1. Loan Approval Comes First
Foreclosed homes are also called REO, real estate owned. Basically just meaning the bank owns the property. However, the same bank that’s selling the home will not also finance the property, you will need to have financing in place before purchasing.
Find a lender and get a pre-approval letter before shopping foreclosure properties. Having a pre-approval letter tells the bank that you’re a serious buyer. After all, most foreclosed properties do not sit on the market for long.
2. Your Agent is Your Best Tool
Searching foreclosure listings gives you a great idea of what is available in your area now, but bank-owned homes move fast. Reach out to several real estate agents, find someone that you feel comfortable with and can build a strong working relationship with.
Some agents may have worked deals on foreclosed home with the bank on previous deals and could have insight into what will be coming on the market, not just what is already there.
Finding the right agent means finding someone that understands not only what you are looking for, but understands your budget as well.
Ask them about upcoming foreclosures that are not listed yet; most of the time the answers will come quickly- within a week. This gives you a greater chance of closing on the home you want.
3. Foreclosed Homes are Sold as-is
Any foreclosed property is sold as-is. This cannot be said enough, and is often forgotten in the buying process.
The difference between being happy in your new home, and struggling to keep it all together could be a proper inspection. There are things any buyer can look for that will give insight into the condition of the home other than obvious damage.
4. Check the landscaping
Poor upkeep of landscaping can tell you about how long the house has been vacant. With some foreclosures this can be far different than how long the home has been on the market. A vacant home erodes and breaks down much quicker than one being occupied.
5. Check if it was Winterized
A foreclosed home that sits over the winter without being winterized could be a nightmare to repair. You will not be able to see the broken pipes until you have a proper inspection, or you turn on the water and find yourself in a flooded house.
6. Check out the Neighborhood
The area the home is in is just as important as the house itself. Not only will you have to live with the people around you, they will affect the value of your home in the future.
Pay attention to what is nearby the neighborhood; what businesses are around, how many other homes are for sale.
Ask yourself if you want to live near that train track that is only used at three in the morning. If the neighborhood is not where you want to be- the price of the house does not matter.
7. Your Budget is More Than Just a Mortgage
All foreclosures will need some sort of repair to them. When figuring out a budget it is imperative that it includes a professional inspection (before buying the home), expected repairs, and some wiggle room for the unexpected repairs.
A home inspection is a must for anyone looking into purchasing a foreclosed property. Someone with technical expertise is able not only point out the deficiencies in the home, but an approximate cost of repairs.
In many cases the buyers can take care of the little things themselves and on their own time. Knowing the house’s problems may not change your mind on buying the house, but it will give you an idea of expenses that will come along with it in the future.
Buyers should expect that, in the majority of these homes, there will be some minor plumbing issues, the heating and air conditioning systems will need to be serviced or repaired.
The key to a successful budget is allotting enough money to repairs so you do not find yourself struggling in an emergent situation.
8. Search Comparable Home Prices
A comparable house is one that is in the same area, about the same size, and not listed as a foreclosure. Searching these other listings gives a ballpark of the value of your home other than what the bank is asking for. Generally speaking there is not much room to negotiate on the prices of houses listed on the foreclosed market.
The list price is fairly close to the bank’s bottom line for the property. They are not going to deduct price for repairs, the neighborhood, or much of anything else. Doing research into a comparable house tells the buyer if they are getting a good deal based on condition nd location, or if they should take a pass.
Home buying does not have to be stressful, buying a foreclosed home should not be a regret. Doing a little bit of research, combined with a good inspection and agent can make all the difference in the world.
Foreclosed listings are bought because they are a great inexpensive option for home buyers; doing it the right way, with the right long-term vision, makes for a happy home.
9. Buy a HUD home
A HUD home is a property that was foreclosed on a homeowner that had a Government backed mortgage, such as an FHA loan.
HUD homes are listing on the HUD home store website. You can search the site and find all available properties in your area. In order to place a bid on a home you will need a realtor. There are some great deals to be found on HUD homes, but you need to act quickly as these properties move fast.