Buying a foreclosed home can be a smart and efficient way to get into your next home. While the process for buying foreclosed homes can differ from the more traditional home-buying journey, there are some distinct benefits, both long-term and short-term.
Buying a Foreclosed Home
Buying a foreclosed home means you’ve decided to take an alternative route to buy your next (or first!) home. While there are several reasons to go this route, it’s essential to understand what foreclosed homes are.
What is a foreclosed home?
A foreclosed home is a home that has been put up for sale by a bank that gave the loan to the original owner. In the case of HUD homes, this would be HUD itself. If an owner stops making mortgage payments, their lenders can retake the home and sell it as a foreclosure. Just remember: if it’s foreclosed, it’s owned by the bank.
How does foreclosure work?
When a home is seized by the bank or by the Department of Housing and Urban Development (HUD), the house is put on the market as a foreclosure.
However, foreclosure is a process that happens in several stages:
Payment Default / Notice of default: This happens when the homeowner has missed at least one payment. The bank sends a notice after 90 days of non-payment, and the homeowner is given a period to pay the late balance or create a new payment plan.
Notice of trustee’s sale: Lenders must make a record of the impending sale with the county and publish the listing in a local paper.
Trustee’s sale: A trustee’s sale is when the lender sells the foreclosed home at a public auction.
Real-estate owned: If the home doesn’t sell during the auction, the bank will officially own the property. The bank will try to sell the property as soon as possible to recoup their losses, and this is typically the stage in which you’d find and buy a foreclosed home.
The process for purchase differs slightly depending on the type of foreclosure you’re looking at. All foreclosure sales have in common is a quick turnaround; HUD and the banks want to recoup their money as soon as possible, so don’t expect good foreclosures to be on the market for long.
How do I find a foreclosed home?
There are several ways to find foreclosure homes; one of the easiest is to go to foreclosure.com or hud.gov. You’ll be able to find listings specifically for foreclosed homes in your area or the area in which you want to buy.
Understand Your Options When Buying a Foreclosed Home
There are a few different ways to purchase a foreclosed home, so it’s essential to know your options before you make a plan.
Short sales happen in the pre-foreclosure phase when the homeowner tries to sell the home for less than they own on the mortgage; if you buy a home this way, the bank will have to approve your bid.
Auctions are another way you can get a foreclosed home. This process is typically quicker than a short sale, but you’ll have to have cash in hand to complete the purchase. If you get a pre-approval letter from a lender, you can use that as part of your auction buy. When you purchase through an auction, you also agree that you’ll take the home as-is, meaning no work will be done on the house before you move in.
Buying from the bank is another option. At this point, the bank owns the home, and the former owner has been evicted. You’ll more than likely need a real estate agent to handle this sale for you as banks don’t often sell foreclosed homes to individual buyers. But, unlike an auction, you’ll be able to tour the house and get an inspection before purchase.
Getting your loan for some may be difficult due to financial hardship so it’s smart to get pre-approved for a loan first; this allows you to see how much home you can afford to buy based on your current status. Without it, you may end up underbidding on homes you won’t be able to afford.
If you have a low credit score or other issues that may prevent you from qualifying, check out other loan options like an FHA loan.
This part of the home buying process is standard unless you’re buying a foreclosed home at auction, in which case you won’t be able to get an inspection done as you agree to buy the house as-is.
Conduct a Title Search
Homes can have more than one mortgage. With this in mind, it’s important to do a title search on the foreclosed home you want to buy. Title searches help you discover things like second mortgages or home equity lines of credit that may have put additional fines or liens attached to the house. It’s important to know about these as you’ll be liable to pay even though you purchase the house from the original lender.
There can be other hidden fees like unpaid taxes or legal judgments. There are specialty firms that handle title searches and typically cost a few hundred dollars but it’s well worth the investment so you’re not surprised after the purchase.
Think About Contract Contingencies
While you won’t be able to add contract contingencies if you purchase the foreclosed home at auction, you may have some negotiating room if you’re buying a short sale or from the bank. Here are a couple of things worth trying to get into a contract:
- A contingency that allows you to walk away from a deal, penalty free, if the inspection uncovers anything out of the ordinary or more costly than the home is worth.
- A contingency that allows you to leave the deal based on the title search results. If you discover the property is mired in other liens and taxes, a contingency like this would allow you to leave the deal so you’re not saddled with paying unforeseen costs.
Depending on how you buy the property, you may have zero negotiating room but these are things to think about before you embark on the process. Be sure to talk with your realtor about this, as well, so they know it’s important for you to know about things up front.
Benefits for Buying a Home in Pre-foreclosure
If you’re buying a house via short sale, then you have a few different advantages:
- Bargaining power: The seller is the homeowner in this instance, so they may be willing to make a better deal for you if it means a faster sale for them. Since the property is in pre-foreclosure, both the lender and the seller are highly motivated to get the property sold before it goes into foreclosure and brings a new set of rules and challenges.
- Condition and title knowledge: In this phase, you can still get the history of the property and get an inspection.
- Flexibility with financing: You can either use regular financing options like a mortgage loan or work out an alternative plan with the owner and lender.
Benefits for Buying a Home at Auction
Once a house goes to auction, you’ll lose the ability to negotiate price and will have to buy the property as-is but there are also a few advantages:
- Price: Because the home is at auction, you have the ability to get it at a price below market value.
- Time: Auction sales are a quick turn around, you either get it or you don’t. If you can’t or won’t do a week of negotiations, this is a big plus.
- Lack of competition: Because auctions require cash bids, there are typically fewer people there to bid, meaning that as long as you have cash on hand, you have a better chance of getting in a winning bid.
Buying a Home Post-Foreclosure
If the home doesn’t sell at auction, then it becomes owned by the bank and it can be sold in the real estate market. Here are the advantages to buying a foreclosed home in this phase:
- Flexible financing: You can use a regular mortgage loan or FHA loan to purchase the home in this phase.
- Bargaining power, concessions, and pricing: Depending on how urgently the bank wants to be rid of the property, you may be able to negotiate quite a bit when it comes to bargaining for things like down payments, escrow length, and even closing costs.
- Condition and title knowledge: The previous home owner has been evicted at this point and the sale of the house can proceed with typical inspection and the property history will be disclosed.
Buying a Foreclosed Home Has Benefits
Like any home buying process, you’ll want to do your research, educate yourself, and partner with a real estate professional to ensure that the buying process is as smooth as possible. Knowing the vocabulary and understanding the process as a buyer will also ensure that you feel comfortable every step of the way and that you’ll get a good deal because you know what to expect and what is out of the ordinary.
Buying a foreclosed home can save you time, money, and the weeks or even months of negotiation that comes with a more traditional home buying process.