How To Buy A Foreclosure And Other Things You Should Know

December 1, 2018 by  
Filed under Foreclosure

Buying real estate can be as exciting as it is tedious and intimidating. Deciding what property is best for you is a major decision. With such an expensive and life-changing purchase, you want to make sure you are making the best choice and avoiding as many mistakes and pitfalls as possible. One of the biggest questions a buyer should ask is how to buy a foreclosure and should you consider a foreclosure property?

When reviewing your options on homes to buy, foreclosures may be on the list. They can seem like the obvious choice, especially when the price and size of the property seem like a steal. Foreclosures can be a great deal to consider, but it’s imperative to know as much as you can about them before making your decision. Knowing how to buy a foreclosure will help you make the best financial decision.

How Foreclosures Work

Foreclosure typically happens when the owner of a property cannot pay the loan associated with the property. Ultimately, it leads to the lender taking ownership of the property and selling it to settle the balance of the debt. Once the property is in foreclosure, the original owner no longer has any rights to the property or the money they may have invested, which can lead to tensions running high during the process. Determining how to buy a foreclosure includes understanding the process of foreclosure.

STAGES OF FORECLOSURE

As a buyer, learning how to buy a foreclosure includes understanding the different stages of the process. Purchasing a foreclosure property is based on the stage the property is in. The stages of the process include:

  • Pre-Foreclosure
  • Auction
  • Real Estate Owned or REO

PRE-FORECLOSURE

pre-foreclosure

After three or more months of missed payments, a property enters pre-foreclosure. At this time, property owners receive a legal notice from their lender,   known as a Notice of Default, to advise them that the foreclosure will begin if the loan is not paid or arrangements are not made. The pre-foreclosure process usually allows for a buyer to work directly with the property owner to negotiate a purchase directly through them. If an agreement can be reached, the buyer will get the property for a great price, and the seller might save their credit from the further damage of an actual foreclosure.

AUCTION

auction

If the owner cannot come up with a resolution during pre-foreclosure, the lender will typically put a property up to be sold at a foreclosure auction, also known as a Trustee Sale. At this time, a property owner will receive a Notice of Sale, which will include the date and time of the property sale.

For buyers, auctions can be appealing, but it’s important to remember that you are responsible for all aspects of the property including repairs, unclear title and any other issues associated with the home. However, if the property does not receive a bid higher than the opening bid to cover the loan balance, it is usually purchased by the representative of the lender, making the property an REO or Real Estate Owned.

REAL ESTATE OWNED OR REO

real estate owned or reo

Once a property becomes REO, a lender will usually hire a real estate agent to list the property for sale. During this time, the lender normally completes the updates and repairs and works to clear the property title. For a buyer, this process can be time-consuming but can be a good fit for the right buyer. Having an attorney or real estate agent that represents you during this process would be best to ensure you receive the best deal.

Advantages and Disadvantages of Buying a Foreclosed Property

A major step in learning how to buy a foreclosure is understanding the pros and cons of purchasing one. Lenders have done a great job of renovating properties to make them more appealing to buyers so that they can minimize their loss as much as possible. As appealing as a foreclosure may be, buyers should ensure they understand the advantages and disadvantages before jumping into a purchase to avoid mistakes and make a smart decision.

THE PRE-CLOSURE STAGE

ADVANTAGES

  • Sellers may cover the costs for the renovations and repairs
  • Buyer may obtain normal mortgage funding
  • Sellers typically move fast during this stage to avoid further damage to their credit and to control the sale of their property
  • Sellers are legally obligated to provide buyers with all details of the home including any known issues or previous repairs

DISADVANTAGES

  • Seller may not agree to a price less than their property debt
  • Buyer's purchase price must cover the full debt, and closing costs or lender’s approval will be necessary
  • A lender can decline the negotiated price agreed to between the buyer and seller


DURING AUCTION STAGE

ADVANTAGES

  • The purchase price for the property will be the balance owed, making it a deal for the buyer
  • Cash payments are a requirement, and those without cash are usually eliminated as buyers

DISADVANTAGES

  • Purchases are same day, cash only with no financing allowed
  • The property could have back taxes, liens and there may be damage to the property by previous owners that are the responsibility of the buyer
  • Buyers make blind purchases because they are not allowed to inspect properties


 ADVANTAGES DURING REO STAGE

  • Buyer will have no liens, back taxes, and mortgages on the property and will have a clear title
  • Bank/lender will negotiate the aspects of the sale
  • Buyer can have the property inspected
  • Buyer can have mortgage financing to cover the property costs
  • The property will be clean and vacant from previous owners

How to Buy a Foreclosure

Once you learn what foreclosure is, the stages of foreclosure and the advantages and disadvantages of the process, buyers' next question usually is how to buy a foreclosure? As you’ve read, the steps to buying a foreclosed property are not typical of a normal real estate purchase because you are not purchasing a regularly listed property.

HIRE A REAL ESTATE AGENT OR BROKER

hire a real estate agent or broker

Purchasing a foreclosed property can be difficult to navigate most times. As a buyer, you need to ensure you have someone on your side that can guide you through the process and answer the tough questions. Hiring a real estate agent or broker familiar with the foreclosure process and that has your best interest will help you choose the best fit for you and your budget. They have the experience necessary to negotiate while finding the best properties in your price range.

RESEARCH LENDERS

Many buyers have the cash to purchase a foreclosure property, but those that don't will need to have financing from a mortgage lender. Buyers should research lenders to determine who has the best interest rates and promotions for financing.

GET PRE-APPROVED

If you need mortgage financing to purchase a foreclosure, you will need to provide a pre-approval letter from a lender. The letter should include the amount you are borrowing and the dates the preapproval is good for. Your pre-approval will be based on your income, credit history, employment history, and other mitigating factors. Having a pre-approval gives the seller or lender the security they need to ensure the property can be financed.

BUDGET FOR REPAIRS AND RENOVATIONS

Repairs and renovations of a foreclosure may be at the expense of the buyer. When applying for financing for the foreclosure or budgeting for a cash transaction, a buyer should budget for repairs and renovations. If you’re handy and can complete repairs yourself, you may save yourself more money. If you need significant renovations and need to hire a contractor, having the budget for it ahead of time will make your process easier, and you can get the repairs done sooner.

TIMELINE FOR REPAIRS AND RENOVATIONS

When purchasing a foreclosed property that needs repairs and renovations, a buyer should be sure they not only have the money but have the time to invest in fixing the property. Whether the buyer is handling the repairs or hiring a contractor, time will be of the essence. Be prepared if renovations take longer than expected and make room for it in your timeline.

WHERE TO FIND FORECLOSED PROPERTIES

Another step in learning how to buy a foreclosure property is to find one. So, where do you find foreclosure properties? Foreclosures can be found in a variety of ways including:

  • Online real estate websites
  • Real estate agents, especially those that specialize in foreclosures
  • Government agencies

Conclusion

Many foreclosed properties have significant value and could be a great buy for the right person. The better the deal, the better it is for the buyer, but it’s also important to remember that not all foreclosures are good deals. A buyer needs to research the real estate market and lenders, the budget for renovations and repairs and prepare for what could be a long process. Learning and understanding how to buy a foreclosure will ease your mind early on and help you make the best investment. We hope we have adequately explained how to buy a foreclosure and helped you decide if it is a good decision for you.

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