The Truth About Buying a Foreclosed Home

Buying a foreclosed home can often be an opportunity to become a homeowner or investor at a lower price, but it also comes with some challenges. If you’ve been wondering, “how do you buy a foreclosed home,” you should first have an understanding of the foreclosure process, the potential pitfalls, and what the market dynamics look like before making a purchase.

Most buyers wonder whether the savings in cost are worth the overall risks. This article will explain the reality of buying a foreclosed home, explaining the process from pre-foreclosure to lender-owned properties and the risks associated.

What is a Foreclosure Home?

A foreclosure home refers to a property repossessed by a lender once it has been deemed that the homeowner is incapable of making their mortgage payments. When the borrower defaults, then the lender proceeds to conduct the foreclosure processes so they may recoup their loss in the case of a sale of the property. Often, properties go for sale by auction at public sales or as real estate owned (REO) properties if it fails to find a sale when offered through auctions.

Not all distressed properties, however, are in foreclosure. Some are in pre-foreclosure, and that is when the owner has defaulted, but still owns the property. Understanding the different stages of foreclosure will help you to locate the most favorable opportunities.

The Foreclosure Process

1. Pre-Foreclosure

Pre-foreclosure occurs when the homeowner is behind on multiple payments, and the lender sends the notice of default (NOD) or lis pendens (suing pending). The owner still keeps the title, but could be at risk of potential foreclosure.

As a buyer, you can benefit from this for multiple reasons. Pre-foreclosure properties are often available below market value because sellers want to avoid foreclosure, as foreclosure can result in a deficiency judgment and will damage their overall credit score.

You can also negotiate a short sale. This would allow the lender to sell the property for a value less than the amount of the outstanding mortgage. A lower price is non-negotiable.

Buying a home in the pre-foreclosure process means fewer bidding battles compared to auction sales since you would deal directly with the owner.

However, pre-foreclosure home purchasing takes time and entails obtaining lender approvals, and the home may have built-in liens or maintenance requirements.

1. Foreclosure Auctions

If the homeowner does not resolve the default, the lender goes to judicial or non-judicial foreclosure, depending on state law. The property is sold at public auction to the highest bidder.

To buy a foreclosed home at an auction, you must often pay in cash or provide proof of financing upfront.

These properties are also sold as-is, meaning you have little opportunity to conduct inspections. If you are the winning bidder, you must pay an immediate deposit, followed by the total amount soon afterwards.

Auctions offer deep discounts, but all risks are assumed by buyers, including potential residents who still live in the house.

1. Bank-Owned (REO) Foreclosures

If the property does not sell at auction, it then becomes REO, and the bank or lender has complete ownership. These homes are put on the open market, typically through government websites like Fannie Mae's HomePath or through real estate agents.

There are some advantages to buying REO properties. You can use traditional financing, including conventional or FHA loans.

REO homes offer clear outstanding liens before resale, meaning the title is not defective and the home has no debt attached to it.

Lenders may also offer you incentives, such as repair credits or reduced closing costs.

Competition is nonetheless likely to be high for these homes and it’s important to consider that REO houses will likely need substantial repairs.

Advantages and Disadvantages of Buying a Foreclosed Home

While buying a foreclosed home seems appealing thanks to its potential savings, it's not always so easy. Here are the pros and cons of such homes.

Advantages:

1. Lower Prices: Foreclosed homes are typically priced lower than market value as banks desire a quick sale.
2. Investment Prospects: You could restore and sell the house for a profit or rent it out
3. Financing Options (for REO Homes): REO homes can be financed with mortgages, including FHA and VA loans, unlike auction properties.

However, the truth of buying a foreclosed home is that the cost savings are accompanied by unseen costs.

Disadvantages

1. Property Condition Risks: Foreclosed homes are sold in their current condition and typically contain damage caused by neglect or vandalism. They also tend to require expensive repairs, which could erase front-end savings.
2. Complex Buying Process: Auctions require quick, cash transactions in most cases. Short sales and pre-foreclosures may take months to close since lenders move slowly to approve.
3. Hidden Costs: Uncollected property taxes, liens, or HOA fees may create additional expenses. Some properties also have existing tenants or occupants, requiring legal eviction.
4. Market Conditions: Property values often do not appreciate immediately, which can therefore affect your immediate investment return.
5. Title Issues: It becomes your responsibility to ensure that the home has no outstanding liens to address.

After learning the truth about buying a foreclosed home, it’s important to evaluate these pros and cons and decide for yourself if buying a foreclosed home is the right choice for you.

How Do You Buy a Foreclosed House?

If you decide that you’re prepared to purchase a foreclosed house but you’re wondering, “how do you buy a foreclosure home?”, here are the steps you should take:

1. Get Pre-Approved for Financing: For REO homes, a conventional, FHA, or VA loan can be used. For auctions, cash is usually required.
2. Find Foreclosure Listings: Look up bank-owned houses online. Search for foreclosure auctions at local county auctions and sheriff sales.
3. Research the Property: Request a title search to confirm whether there are any unpaid liens or legal judgments against the property. If possible, schedule an inspection before making an offer.
4. Submit a Competitive Offer: In pre-foreclosures, deal directly with the homeowner and lender. In REOs, employ an agent to make offers on behalf of the bank.
5. Close the Sale: Have all financing and legal papers in order. Prepare for repairs or renovations necessary prior to occupying or leasing the property.

Final Thoughts

Buying a foreclosed home can be an intelligent financial move, but only if you understand the possible pitfalls. The fact of buying a foreclosed home is that there are huge cost savings, but it involves a lot of research and patience. How do you buy a foreclosed home successfully? Partner with professionals, research extensively into the homes, and allow a budget for restoration to ensure you make a profitable investment.