Buying Foreclosed Homes for Dummies in 11 Steps Even You (Yes, You!) Can Do

Step 3: Figure out your financing

If you’re 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.”

However, 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,” says Stewart. 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, 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.”

According to HomeAdvisor, home inspections range from $281 to $402, varying based on factors such as the local real estate market conditions, the size of your home, and the experience level of the home inspector.

Can you buy a foreclosure home without an inspection? Absolutely. But it may come at a high cost to you.

Step 10: Get a property title search

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: Close on your foreclosed property

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, the property you’re buying and anyone else listed on the title. When everything looks good, sign your loan paperwork.

Ready to buy a foreclosed home?

For many, the allure of purchasing a foreclosed home is the potential cost savings, but as with all investments, there’s a trade-off: while the price tag might be tempting, the process of securing a foreclosed home can be complex. With the right knowledge and expert guidance, you can navigate your foreclosure purchase successfully.

So, is buying a foreclosed house the right hack for you? Only you can make that determination. The more you arm yourself with information, the better positioned you’ll be to make decisions that align with your investment goals and risk tolerance.

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