Buying Foreclosed Homes for Dummies in 11 Steps Even You (Yes, You!) Can Do
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Real estate hacks for buying and selling your way to wealth can be hard to find. Maybe the allure of a quick win or the challenge of scoring a good deal is too good to resist. Is buying a foreclosed house for dummies a hack that would work for you? Find out: Here are the 11 steps to buying foreclosed homes for dummies.
Step 1: Be clear on why you want to buy a foreclosure
Generally, lenders will take much less than top dollar for a foreclosure, which is good news for anyone looking to score a deal on real estate. But although you might pay less than you would on the open market, closing a sale on a foreclosure can take a long time, and properties may be sold “as-is,” without a seller’s disclosure. So there’s no guarantee on the home’s condition, especially if it has been vacant for some time. It’s not uncommon to get stuck with major repairs!
Even so, maybe this home makes sense as an investment because it has attributes that are hard to come by, or it’s in that perfect neighborhood near good schools and sought-after amenities. But if you’re not an experienced investor who has a background in fixing up homes to flip or rent, buying a foreclosure might not be a strategy you want to tackle on your own immediately. There are a lot of other ways to invest in real estate!
It’s important to know the potential buyers may have a whole lot of work ahead of them because the homeowners likely didn’t have the funds to keep the property in good shape for the past several years.
- Mary Stewart Real Estate AgentCloseMary Stewart Real Estate Agent at Compass RE Texas
- Years of Experience 43
- Transactions 293
- Average Price Point $335k
- Single Family Homes 264
Step 2: Understand the different types of foreclosures
Before you get started down the road toward buying a foreclosure, it’s good to know the different types of sales that you might encounter.
A preforeclosure means the homeowner has stopped making payments or fallen behind on their mortgage payments. It is the first step (but a very serious step) in the foreclosure process. A short sale is a type of preforeclosure; when a homeowner stops making payments on their mortgage and owes more on the home than the house is worth in the current market, then they will need to sell the house for less than they owe, and the lender will be “short” on the amount of money they accept in the sale (hence the name).
However, unless homeowners can come current on their current mortgage or negotiate a loan modification, they will lose their home. Depending on the state where the property is located, mortgage preforeclosures can range from a few weeks to a year or more.
Mary Stewart in Sugar Land, Texas, is in the top 1% of agents in her area for successfully selling homes. She says that if the owners can prove there’s no way they can make a payment, the property can go to preforeclosure. “But it takes literally months. I mean, it takes probably, at the minimum, three to four months to get a short sale through.”
A foreclosure means the house has been repossessed by the lender and is typically being put up for auction. A home isn’t considered repossessed until a foreclosure becomes final. However, if the homeowner manages to catch up on any missed payments before the final deadline, a foreclosure sale could be voided. So be prepared for disappointment.
You probably won’t be able to get an inspection of the inside of a property before bidding, as sales of foreclosure properties are often sold “as is.” Some auctions do allow interior inspections, so stick with those auctions if you fear buying a dilapidated and rundown property.
Stewart says that foreclosures may not take long to turn over if the mortgage company has already listed the property with an agent. “But it’s important to know the potential buyers may have a whole lot of work ahead of them because the homeowners likely didn’t have the funds to keep the property in good shape for the past several years.”
Real-estate owned (REO) homes
A real estate-owned (REO) home has been put up for sale at a foreclosure auction — but it didn’t sell. Now, the bank or another lender owns it and has listed it on the open market.
Lenders may prepare the property for sale and determine a listing price, which typically will be based on current market values, so don’t expect a tremendous deal. Although sold “as is,” you can typically still get an inspection.
Step 3: Figure out your financing
If you are paying cash, you can buy a house at auction. Otherwise, with a mortgage, you’ll probably be limited to a preforeclosure or an REO sale. But before considering either path, you’ll want to take steps to get preapproved for a mortgage loan. Once you have that in your pocket, you’ll be more likely to be taken seriously by a seller.
Be aware that many lenders won’t offer to fund properties in foreclosure. The main reason is the house may not pass an inspection, says Andy Kolodgie, founder of The House Guys operating in Washington DC. “A good option to finance foreclosed properties is with 203(k) loans from the Federal Housing Administration.
“This option helps buyers finance a foreclosed property plus any required repairs into a single mortgage. To cover basic repairs, buyers can borrow up to $35,000 on top of the mortgage amount,” explains Kolodgie. That means one loan and one closing. Your down payment will be based on the total value of the loan, and because repair costs are included in the loan amount, you’ll want to budget for higher monthly payments.
Step 4: Find an agent who knows these sales back, forth, and sideways
Stewart says that there are real estate agents in many locations that only handle foreclosures. “In fact, if I see a certain agent’s name on a listing, I know right away it’s a foreclosure property.”
But not all agents are well-versed in the foreclosure process or want to deal with the time and paperwork involved.
Even so, an agent who understands these sales back and forth and sideways may get you an even better price on the property. They know the pitfalls of these transactions and have expert insight into what you should avoid.
“They also know the neighborhoods and fair market values in the area, if there are claims or other encumbrances surrounding the property, the history of the home, and more.” Besides, sometimes these transactions can stretch on for months, so it’s nice to have a knowledgeable agent alongside who will ride it out with you.
Step 5: Find the home you want to buy
There are several ways to find foreclosures.
You can work with an agent, check out websites that list foreclosures and bank-owned properties, or keep track of local auctions. You may find a list at your local courthouse and some government agencies. Large banks, such as Wells Fargo and Bank of America, also have lists of foreclosure properties. A few of the larger online auctions include auction.com, foreclosure.com, and Bank Foreclosures Sale.
- The Department of the Treasury lists homes repossessed by the Internal Revenue Service.
- The U.S. Department of Housing and Urban Development (HUD) maintains a list of its foreclosure homes.
- Through its HomePath website, you can find foreclosure properties from the Federal National Mortgage Association (Fannie Mae).
Step 6: Determine a fair offer price
You will likely have the chance to trim some costs from the final price when buying a foreclosed home at auction. But how much you save depends on the market, the house itself, and the negotiation process with the homeowner if it’s a preforeclosure. You definitely don’t want to overpay for a home that needs a lot of work!
You may also want to talk to your agent about putting together a comparative market analysis (CMA) that gives an idea of what similar homes in the area are worth so that you’re offering something reasonable but not overbidding.
A CMA can estimate the value of specific properties by comparing them to recently sold properties in the immediate area. A CMA will look at the age of a home, the square footage, the number of bedrooms, location, and the property’s condition. That can be a big help with determining a fair offer price.
Step 7: Make your bid or offer
Your agent will help you write up a bid or offer and advise you on contingencies to include. For example, you can agree to an “as is” sale without requesting any repairs. But if the inspection turns up anything gnarly, with an inspection contingency, you can walk away from the sale. This is just another reason why having an agent by your side can ease the process. Because most auctions are all about cash offers, you typically can‘t get a mortgage or use a lender.
Some auctions take place entirely online, with photos and property details included. You compete with other online buyers and hope the property is represented well so you’re not left with a house needing significant repairs. You can also bid in person, but real estate investors usually flock to any in-person listings and tend to outbid potential homeowners with high all-cash bids.
Auctions also have rules that you’ll have to follow to place bids, which can include:
- Pay a deposit. Many online and in-person auctions require registration. You’ll also likely have to make a deposit in the form of a credit card authorization.
- Paying an earnest money fee. This shows you are a serious bidder. This fee, which is usually around 5% of the final sales price, is refundable (if you don’t win) or can go towards earnest money (if you do win).
- Show proof of financing. Many online auctions don’t have financing options available. If you bid in person, you will likely have to show you have the cash to close the deal.
- Be prepared to pay a “buyers premium.” Most auction houses take a percentage of the total sales price for conducting the auction. If the property is bank-owned, the bank may pay this fee instead.
Step 8: Gather your earnest money (or all your money)
If the seller or lender accepts your offer, you’ll then be expected to hand over any earnest money you offered to pay.
At many auctions, you’ll be required to go over the sale documents and pay the total purchase amount as soon as the auction is over. Some auctions allow a few days to gather your money and sign the documents.
Step 9: Get an inspection (if you can)
If the property is a preforeclosure or REO sale, get an inspection after your offer is accepted so that you know exactly what needs repairing or what is wrong with the house.
- HUD (Department of Housing and Urban Development) never assumes responsibility for inspections of a foreclosed home. However, they do allow bidders to do (and pay for) their own inspections.
- The same is true for REO home sales. They are sold as-is, and mortgage lenders don’t like offers contingent on a home inspection.
- Keep in mind that federal agencies have different policies concerning pre-sale inspections.
- Most banks won’t pay for inspections, so it’s up to bidders to request inspections and pay the inspection fees.
“You should consider investing in a home inspection,“ advises Tim Schroeder, a licensed agent and investor. “An inspection from a credentialed inspector can add $400 to your costs but will help prevent any unfortunate surprises.”
Can you buy a foreclosure home without an inspection? Absolutely. But it may come at a high cost to you.
Step 10: Title review
It’s really best to hire an attorney to do a thorough title review before bidding on a property. And you should definitely consider getting title insurance for yourself as the homeowner just in case your title company doesn’t catch everything.
This is especially important for a foreclosed home, where there might be more than one claim or lien. A title review is not required, but it will show if anyone other than the leaseholder has a claim on the property.
Step 11: Closing
Closing on a foreclosure is not a one-size-fits-all process. However, just like in a regular home sale, you’ll likely need to show proof of homeowners insurance.
Pay attention to all the details in the closing documents. It might be wise to hire a real estate attorney who can prepare and file the deed. You’ll need to provide basic information about yourself and the property you’re buying and anyone else listed on the title. When everything looks good, sign your loan paperwork.
All that’s left now is to collect your keys!
Header Image Source: (Roger Starnes Sr / Unsplash)