Buying Foreclosed Homes for Dummies in 11 Steps Even You (Yes, You!) Can Do
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Kathryn Pomroy, Contributing AuthorClose
Kathryn Pomroy Contributing AuthorKathryn Pomroy is a professional writer with more than 15 years of experience writing for major publications, small- and medium-sized business clients, real estate publications, and several business journals. She is proficient at researching, fact-checking, editing, reviewing and updating all forms of content, and pushing the envelope on authoring engaging and inspiring text. A former real estate agent, Kathryn understands the market, taxes, homeownership, insurance and so much more. Kathryn holds a degree in Journalism and lives in northern Minnesota.
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Sam Dadofalza, Associate EditorClose
Sam Dadofalza Associate Editor
Sam Dadofalza is an associate editor at HomeLight, where she crafts insightful stories to guide homebuyers and sellers through the intricacies of real estate transactions. She has previously contributed to digital marketing firms and online business publications, honing her skills in creating engaging and informative content.
You find a house that’s thousands (or even hundreds of thousands) cheaper than everything else on the market, and suddenly you’re thinking, “Could this actually be my deal?” That’s the appeal of foreclosures: they can give bargain-hunting buyers a shot at property below typical market prices. But there’s a reason these homes can come with bargain-basement price tags, from neglected repairs to complicated buying processes.
Consider this your crash course in buying foreclosed homes for dummies. We’ll walk through what to expect, where the risks hide, and how to tell a true bargain from a money pit.
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Step 1: Be clear on why you want to buy a foreclosure
Buying a foreclosure can be a good way to get a home for less than you might pay on the open market. But that lower price can come with a few strings attached: foreclosures can take longer to close, may be sold as-is, and may not come with a seller’s disclosure.
In other words, that bargain may come with a few plot twists. Before you get too attached to the idea of a foreclosure, figure out what makes this particular home worth the extra hassle.
If it needs major repairs, does the price leave enough wiggle room in your budget to tackle them? Or does the property have something tough to find elsewhere, like a great location, a desirable school district, or features that could make it a solid long-term investment? Knowing what you’re getting into and why you want the home in the first place can help you decide whether the discount is actually worth it.
If you’re buying as an investment, think beyond the initial discount and consider what the property could do for you down the road. A foreclosure can be a worthwhile addition to your portfolio if the numbers work, the location has staying power, and there’s enough upside to justify the time and money you’ll put into it.
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 you might encounter.
Preforeclosure
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.
Unless homeowners can come current on their 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, a top real estate agent in Sugar Land, Texas, 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 months, literally. I mean, it takes probably, at the minimum, three to four months to get a short sale through.”
Foreclosure
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.
If the home does make it to auction, 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.
It’s important to know that 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 46
- Transactions 401
- Average Price Point $363k
- Single Family Homes 363
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’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 $[7]5,000 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.
»Learn more: A foreclosure might come with a tempting price tag, but you still need to know what you can realistically afford. Use HomeLight’s Home Affordability Calculator to crunch the numbers and set a budget before you start house hunting.
Step 4: Partner with an agent who knows these sales back, forth, and sideways
Not all agents are well-versed in the foreclosure process or want to deal with the time and paperwork involved. The good news is that some agents specialize in foreclosures and know how to navigate the process from start to finish.
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.”
Prioritize partnering with an agent who understands these sales back and forth and sideways, so you can get an even better price on the property. These experts know the pitfalls of these transactions and have professional 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.
Sometimes foreclosure transactions can stretch on for months, so it’s nice to have a knowledgeable agent alongside you 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 Bank of America, also have lists of foreclosure properties. A few of the larger online auction portals 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’ll 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.
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. It’ll 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 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:
- Make a deposit: Many online and in-person auctions require registration and a deposit in the form of a credit card authorization.
- Pay 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 toward 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 “buyer’s 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: Conduct a home 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.
The HUD 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.”
Home inspections range from $296 to $424, depending on factors such as local real estate market conditions, your home’s size, and the home inspector’s experience.
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 multiple claims or liens. 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, similar to 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.
Essential tips for first-time foreclosure buyers
Now that you know the basic steps to buying a foreclosed home, it’s time to look at a few things that can make the process easier,especially if this is your first time. From giving yourself extra time to setting aside a little more money than you think you’ll need, a bit of preparation can go a long way. Keep these considerations in mind as you move through the process so you can approach your foreclosure purchase with fewer surprises and more confidence.
- Manage expectations and have patience: Buying a foreclosure rarely follows the neat, predictable timeline of a traditional home purchase. The process can involve extra paperwork, lender approvals, inspections, title issues, or other steps that can slow things down. And because foreclosed homes may have been neglected or left vacant, don’t be surprised if the property needs more time, money, and elbow grease than you initially expected.
- Create a buffer budget: Don’t build your foreclosure budget down to the last dollar, even if the purchase price looks like a bargain. Set aside extra cash for unexpected repairs, maintenance, inspections, and closing costs that can pop up along the way. Having a financial cushion gives you more breathing room if your “great deal” turns into a slightly bigger project than planned.
- Understand local foreclosure laws: Foreclosure rules can vary quite a bit depending on the state and even the county where the property is located. The timeline, bidding process, redemption rights, and other requirements may look very different from one place to another. Consider consulting a local real estate attorney who can explain the rules that apply to your specific purchase and help you avoid costly legal surprises.
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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? That’s really up to you. The more you know about the process, the better you’ll be able to weigh your options and decide if it makes sense for your investment goals and comfort with risk.
If you want some expert guidance along the way, HomeLight’s Agent Finder can connect you with top local agents who know the market and can help you navigate the foreclosure process. It’s an easy way to find an agent who can help you spot opportunities, avoid costly surprises, and make a more informed decision.
Frequently asked questions (FAQs) about buying foreclosed homes
Pre-foreclosure is the warning stage: The homeowner has fallen behind on mortgage payments, but the lender hasn’t officially taken the property yet. A foreclosure happens when the lender moves forward with the legal process to take ownership and sell the home to recover the debt. In other words, pre-foreclosure is the “something’s wrong” stage, while foreclosure is when things have officially escalated.
Sometimes, but it depends on how the foreclosure is being sold and who currently controls the property. REOs are often available for showings, while homes sold at auction may not be open for interior inspections beforehand. If you can’t see inside, make sure you understand the risk before bidding. You could be buying a home with some serious surprises behind the door.
No, a foreclosure isn’t automatically a bargain just because it’s a foreclosure. Some sell below market value, but competition, the home’s condition, local demand, and the seller’s pricing strategy can all affect the final price. Before getting excited about a “deal,” compare the price with similar homes sold nearby and factor in potential repair costs.
First, change the locks and make sure the property is secure, especially if you don’t know who may still have access. Then check for urgent repairs, utilities, insurance coverage, and any signs of damage that need attention right away. Once the immediate stuff is handled, you can tackle the bigger projects and start turning your foreclosure find into a home.
Header Image Source: (Roger Starnes Sr / Unsplash)
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