How to Buy a Foreclosure: Our Step By Step Guide

When looking at how to buy a foreclosure, there are a couple of things you should consider. Foreclosures are usually listed well below the market value, but buying homes that have been foreclosed on require some extra effort. Before we look at how to buy a foreclosure, let us look at what a foreclosure is.

A foreclosure usually happens when a homeowner can no longer make their monthly mortgage payments. The bank then takes control of the property and lists it for sale to cover the rest of the loan costs. Former owners are asked to vacate the property, and the bank can sell or auction the home off. There are three different stages of a foreclosure

In this stage of foreclosure, the current owner has been given notice that the property will be foreclosed on. They must get the mortgage back in good standing with the lender, or risk having the property taken by the lender.

The owner may also sell the property before the lender takes possession. Buyers will deal with the owner in this stage, making an offer to buy the property outright.

If the owner does not get the mortgage back in good standing, then the lender may put the property into a foreclosure auction. Winning bidders will have to pay cash at the time of purchase. Where foreclosure auctions can offer great bargains, there is no time to research the property and the buyer will take on all the problems that might come with the property.

At this stage, the bank has taken possession of the property with the goal of getting back the value of the unpaid loan. This process will take a lot longer than the previous two, but there will be a title search on the property and the buyer can have an inspection done.

Buying a foreclosure has both its benefits and its risks. Homebuyers have a chance of finding a home well below market value. Homebuyers will also experience more stress from dealing with a foreclosure than other types of listings.

The best appeal and benefit of buying a foreclosure is the money you can save. Foreclosures can save you around 15% compared to neighboring homes, which can make a lot of difference. However, even though the savings can be great, you must be patient and able to stomach the process.

For most, buying a foreclosure is an investment that takes time, money and resources. It is something to add to their real estate portfolio or to flip for profit. If you are buying to make it your home, just know all the problems with the property will be your responsibility. This includes repairs, title issues, and anything else that might encumber the property.

It is possible to receive a conventional loan for a foreclosed property. You may even get a loan from the Federal Housing Administration (FHA) or from Veterans Affairs (VA), but foreclosures are usually better for those who can pay in cash for the property.

Sellers of foreclosed properties are partial to cash-only buyers. A lender doesn’t have to get involved, which means a home appraisal and home inspection will not be required.

With all that in mind, you must also think about what it will cost to renovate or bring the home back up to code. Since most foreclosures don’t have an inspection done, the property could be in a worse condition than you expected, requiring more funds to do necessary work.

Taking all of this into consideration, and deciding that buying a foreclosure is right for you, let’s look at how to buy a foreclosure

You will want to find a broker that specializes in foreclosures. Preferably someone who works closely with banks on bank-owned properties and knows the ins and outs of foreclosure transactions. The best place to look is on an online database that deals with foreclosed homes. You could also look around on local real estate websites that allow you to filter for foreclosures.

Banks will work directly with real estate brokers to deal with their real estate owned (REO) properties. When you begin the process, you will work directly with the bank’s broker instead of a real estate agent.

It would also be wise to contact the bank’s broker on foreclosures you are interested in and ask them of any foreclosures that may not be listed yet. It can take a few days or up to two before new listings are posted.

If you plan on paying cash for the property, then you won’t have to worry about getting a preapproval letter. If you are looking to get a loan, then you want to get a preapproval letter from the lender you plan on using. This specifies how much money you can borrow based on your lender’s assessment of your credit score.

It would benefit you to get the preapproval letter before trying to find a property. This way, when you reach out to brokers, they can tell that you are serious about buying.

You will want to look at the recent sales price of comparable properties, or “comps.” The bank could list the property too high, giving you the advantage of making an offer lower than what they want. Most times with foreclosures, the bank has listed the property well below “comp” prices and could end up with multiple offers above the listing price within hours of listing. Looking at the “comps” and knowing the listing price of the property will help you in making an offer.

You will want to look at how fast other “comps” are selling. If they are selling fast, then you will want to make your highest and best offer on the property. If the property has been listed for a long period, then you may make a lower offer.

Foreclosures are usually favorably low compared to other listings, so going with a higher price that is still cheaper than similar properties keeps money in your pocket. Now, the cost of repairs should not be a factor in determining your offer price because the “comps” will be properties with similar conditions as the one you are looking at.

The stage of the foreclosure is a big contributor to how you should proceed. How to buy a foreclosure in the pre-foreclosure stage requires you to move quickly and tactfully.

The property is about to be foreclosed and the owner has been notified. Be understanding of the owner’s situation and make sure everything is in writing. Having a real estate agent or an attorney familiar with foreclosures will be helpful.

How to buy a foreclosure in the foreclosure auction stage requires you to have cash on hand. The property is being auctioned off to repay the debt, so starting bid prices will be low enough to be tempting.

You will want to understand the requirements to take part in the auction. Most auctions require you to bring a certified check for $5,000 payable to the auction company. You will also want to research the interested property, using available public records.

The last stage, a bank-owned, doesn’t require quick action from the buyer like the previous two. Instead, how to buy a foreclosure that is a bank-owned requires a lot of patience.

It can take weeks to get a response to an offer you make because the banks have to go through their shareholders and investors. The properties are sold “as-is,” meaning the lender won’t make any repairs for you.