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Buying a Foreclosed Home: 10 Things You Need to Know

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Buying a Foreclosed Home: 10 Things You Need to Know
5 min. read

Image: Andy Dean Photography / Shutterstock.com

Buying a home is difficult enough, but buying a short sale or a foreclosed home comes with its own set of challenges. Foreclosed homes can be extremely enticing, and they often sell for a lot less than typical homes. Tales of wily investors snatching up a bargain and making a hefty profit flipping a foreclosure are widespread. So, it’s no surprise that would-be homeowners want to jump on the bandwagon, too. 

However, it’s not as simple as it seems to buy a foreclosed home. And, while you can save a lot of money, you’ll also need to be prepared for the red tape and limitations associated with buying a foreclosure. Let’s take a closer look at what you need to know before you bid.

Typically Sold As-Is

Foreclosed homes are sold by lenders after the previous owners were no longer able to make their mortgage payments. As a result, the banks are already losing money, and they have no desire to spend any more cash on fixing a foreclosed home. Consequently, there’s very little room for negotiation, and you’ll normally end up with a home that needs some renovations.

Two Ways to Buy

You may think that you’ll have to bid on a foreclosed home at auction. However, there is a second way to buy a foreclosure. If it doesn’t sell at auction, it becomes “real estate owned” (REO), which essentially means it’s owned by the lender. The lender will then hire a real estate agent to sell it, similar to a typical sale.

Auctions Aren’t Always the Answer

It’s generally considered more difficult to buy a foreclosed home at auction for several reasons. First, you’re likely to be up against more experienced real estate investors. Second, if you do outbid the pros, you’ll be required to pay the full amount upfront – either in cash or by check. Finally, you can’t view the home or have an inspection when you buy it at auction, so you never really know what you’re getting into.

REO Foreclosures Are Easier

The easier option is to seek out REO foreclosures – those that have already failed at auction. The buying process is much the same as a standard sale, although it’s still likely to be cheaper, as the lender wants to recoup as much of their losses as possible. With an REO foreclosure, you’re able to have an inspection and title check, and even make an offer. Then, you’ll work with their real estate agent to come to an agreement.

Inspections Are Essential

If you go down the REO route, it’s even more essential to have the home inspected – even though it will probably be sold as-is. In a foreclosure, the previous owners were unable to keep up with their mortgage payments, so it’s unlikely they were able to stay on top of any maintenance. A foreclosed home could have a number of problems, which could be anything from minor renovations to major repairs.

… and so Are Title Checks

It’s also a good idea to carry out title checks on the home, as many foreclosures can have liens, unpaid taxes and loans, and even unpaid HOA fees attached to them. These costs will be transferred to you if you’re not careful, and they can cost thousands of dollars. As an extra precaution, it’s worth taking out title insurance, as well.

Prepare for Repairs

Because many foreclosures are in need of some kind of renovation, you’ll need to be sure to budget for it. If you buy an REO foreclosure, you should have an inspection to see what you’re getting yourself into. One great solution is to take out a renovation mortgage, such as an FHA 203k loan. This is open to owner-occupant buyers rather than investors and allows you to add a significant sum of money to your mortgage for repairs and renovations.

Look for HUD Homes

HUD homes are owned by the Department of Housing and Urban Development (HUD) and were foreclosed on by owners who had taken out a Federal Housing Administration (FHA) loan. These are great for owner-occupant buyers – the preferred market for HUD – and are an excellent way to grab a bargain. Check their website for their full stock. You’ll need to work with a real estate agent and be pre-approved for a mortgage in order to qualify for a HUD home.

Act Fast to Beat Investors

With HUD homes, a grace period of 60 days is given in which owner-occupant buyers get first dibs before the homes are offered to investors. So, it’s worth keeping your eyes peeled and acting fast, as investors are unlikely to hang around for long.

Number of Foreclosures Down

The stock of foreclosed homes has dropped significantly over the last decade. This fact – combined with an increase in those looking for an opportunity to grab a bargain – has created more competition and higher prices. It’s unlikely that you’ll nab as big of a bargain as you would have in 2010 (when the stock was 62% higher than it is today), but it’s not impossible.

 

Disclaimer:
This article is intended for informational purposes only and should not be deemed as legal, financial or investment advice or solicitation of any kind. Before purchasing real estate or insurance, always consult with a licensed attorney, financial advisor, insurance agent and real estate broker.

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