By Bill Gassett
Let me guess: You are interested in buying a foreclosure property? When you want to buy a home, but the mortgage payments are difficult to afford, buying a foreclosure can look attractive. The unfortunate previous homeowner will have struggled with the costs of the mortgage, ending up with the home foreclosing to the lender.
The bank or other financial lender wants to sell these homes and get as much of their money back as they can. They are looking to get their money back quickly, and this can mean selling for less than the market value. This is where you can pick up a bargain that would otherwise cost more than you could afford.
Buying a foreclosed home is a little different from a standard sale, and there are some things you need to know. While you might be concerned about purchasing a foreclosure, if you are prepared to do more research and take slightly more risk, there could be significant savings to be made.
Let’s review the foreclosure procedures and the steps you should follow to successfully close on a home.
Stages of Foreclosure
A foreclosure goes through different stages, and this will change what you have to do to buy the home.
The pre-foreclosure is when the property is still owned by the person who is having difficulty with the mortgage payments. They are keen to sell to avoid the full foreclosure of their home. This is also known as a short sale, and the seller will often need the permission of the lender to sell the home for less than the loan amount. This can be a difficult situation, with two parties having a say in the sale.
A short sale will need to make financial sense to the lender for them to approve it. Don’t think you can make an offer on a short sale that is not within a reasonable amount from the fair market value. The mortgage holder will send an appraiser out to evaluate the property. The lender will not agree to sell the home significantly under what the appraiser has reported.
Can you get a discount? Sure, in most cases, you can—just don’t expect it to be monumental.
The next stage in a foreclosure process is the property getting auctioned. Typically, the seller will have missed quite a few mortgage payments. They will also be notified that if they don’t catch up on the mortgage payments due, the lender will initiate foreclosure proceedings. If the owner does not catch up, the lender will eventually file for foreclosure.
Once the home has gone into foreclosure, it will be offered for sale in an auction. This is the most common way to buy a foreclosed home and can mean that the transaction happens quickly. A buyer will typically need cash to buy, and there are other risks involved.
There may not be the chance to properly research an auction property. This could mean that there are repairs needed or a lien on the title, which could result in unforeseen expenses. You, unfortunately, are buying the home “as is” and “where-is.” Many times, you will not be able to set foot inside the property before the auction takes place. Buying a home at auction is not for the faint of heart.
There is a significant risk you are buying a money pit or a home that could have any number of problems, including liens or title issues. You could spend tens of thousands of dollars trying to clear up these problems. The keyword? RISKY!
If the home doesn’t sell at auction, the property moves to the real estate-owned or REO stage. This means that the lender owns the house and will likely sell it through a real estate agency. Bank-owned homes are far less risky to an end buyer because by the time the bank owns the property and sells it again, all the liens and issues will be squared away.
The bank will be selling the home to the buyer with a clean title. Bank-owned homes are usually priced near market value, but if they don’t sell reasonably quickly, the bank will often discount them to get it off the books. Banks are not interested in being property owners.
Setting Your Budget
Understanding what you can afford is an integral part of buying a home, and this is particularly true with a foreclosed home. You may be able to find a home that is far cheaper than it would otherwise be, but you still need to set your budget to avoid problems.
Write down your monthly income and costs, so that you can better understand what mortgage payments you can cope with. Failure to do this could lead to your new home becoming a foreclosure once again. It is also advisable when you’re about to purchase any home to make sure your financial house is in order. Getting a copy of your credit report and checking it for errors will be prudent as they can severely impact the loan terms you’ll get.
When you know your budget, you should get pre-approved by a lender. They will check your credit and tell you how much they are willing to offer you. This enables you to narrow down your search to foreclosures within the mortgage pre-approval amount.
With a pre-approval letter in hand, you will be a more attractive buyer. The bank selling the home will know that the sale should close faster, and this could be the difference if there are multiple interested buyers.
Your credit score is essential during the pre-approval process. Any changes to your score or financial situation after the pre-approval could result in you not getting final approval for the loan amount expected. You should avoid taking out any new credit in that period, to prevent the chance of your mortgage not being approved.
The Benefits of Experience
One of the best tips for buying a foreclosure is to find a real estate agent who has experience with distressed properties. If you aren’t entirely familiar with either purchasing a foreclosure property or the area you are looking to buy, the services of an experienced buyer’s real estate agent will be essential to guide you in the right direction.
They will have an understanding of the prices in the area and will know if the foreclosure is really the bargain you are looking for. Finding the right agent should also give you access to properties you might have otherwise missed.
The experience of the real estate agent should help you to understand the issues involved in the purchase and alert you to any legal concerns which you could run into.
Presenting an Offer
How you make an offer on the property will depend on the foreclosure stage it is at. Your real estate agent will contact the owner of the home or will be with you during the auction. During an auction, you need to stick to your budget and not get in a bidding war with another party.
When buying a short sale or bank-owned property, the offer should be contingent on having a home inspection. If there are significant problems, however, don’t expect the lender to make the repairs. Home inspections will generally be for informational purposes only. They won’t be interested in negotiations or fixing problems with the home, so walk away if the issues are too much for you.
Make sure you stay in line with all of the contract dates, so you don’t forfeit your earnest money.
Final Thoughts on Buying a Foreclosure
Do research where you can and avoid making a quick decision to reduce the risk. If you are prepared for the extra issues of a foreclosure property, you could find yourself a good deal. There should be far more due diligence on your part to make sure you’re not walking into a hornet’s nest. Hiring an attorney will be highly advisable to make sure your interests are protected.
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell Metrowest Massachusetts real estate for the past 33 years.