For most people, buying a house is the largest purchase they will ever make. But the potential payoff is huge -- a home of your own, a place for your children to grow up and, in the absence of another rare major market reversal, a good long-term investment.
One way to help ensure you get the most house for your money is to buy a foreclosed home. The housing market has been glutted with foreclosed properties because of the recent recession, and many of the houses present discounted opportunities for savvy buyers.
On the surface, buying a foreclosed home appears to be as straightforward as buying a home in the traditional real estate market. However, the foreclosures market is considerably more complex and requires buyers to proceed cautiously in order to buy a foreclosed home at a discounted price.
Get Preapproved for the Loan
This is the time to get your financial house in order. You’re planning to borrow a lot of money, and it’s important to do everything you can to make sure that your loan goes through without any issues.
Work with your loan officer to get preapproved for a mortgage loan. If necessary, your loan officer can suggest ways in which you can improve your credit score and can suggest resources that will help you improve other aspects of your financial situation.
In most cases, the buyer of a foreclosed property has no more trouble getting preapproved for a loan than would a buyer in a traditional transaction. Some lenders, however, are more cautious, and if the home was left in bad shape by the previous occupant, the lender might not be willing to lend on a property that’s in disarray.
Title insurance ensures the title to the house is free of any additional claims and is required on all purchases that involve a loan. While it's not required if the sale is cash only, as is often the case in foreclosures, buying the insurance is still the prudent thing to do. Your loan officer or real estate agent can advise you on this.
Begin Your Search with Information
Legal aspects of buying foreclosures varies by state and some states require steps which are far outside traditional buying practices. Foreclosures are legal proceedings and are treated as such. For example, in certain states the lender must actually bring suit against the borrower in order to get a court order to sell the property. Granted this is on the selling end, but the legal aspects can certainly present hurdles to buying the home as well. Rather than just jumping into auctions and foreclosure listings, buyers should do a bit of research on what is required in their state for a foreclosure sale.
People typically buy foreclosed homes directly from the lender, though some are sold at auction. In either case, be sure to find a knowledgeable real estate buyer's agent. Listing agents work for the bank -- you need a real estate agent with experience in buying foreclosures in your corner. Some agents have special training to work with foreclosed properties. As an example, the National Association of Realtors offers short sale and foreclosure certification (a short sale occurs in lieu of a foreclosure, when the lender allows a homeowner behind on payments to sell the house for less than the loan balance). While certification isn’t mandatory, it is a good indicator that the agent has been formally trained on foreclosures. With foreclosures averaging one out of every five home sales nationwide recently, there are very few agents that do not have at least some experience with foreclosures.
Focus Your Search for Foreclosed Homes
When you begin actively searching for foreclosed homes, do so with clear criteria in mind. Especially in areas where prices rose the highest during the high-performing years of real estate, home values have fallen significantly as a result of the huge number of foreclosures coming onto the market. In these areas, it is particularly easy to become overwhelmed with the sheer number of choices when considering a property. Knowing what you’re looking for ahead of time will make the search far more productive for you and your real estate agent. Prepare two lists – one containing the "Must-Have" features, and one containing the "Nice-to-Have" features, and provide your real estate agent with a copy. These lists can save both you and the agent a lot of time and effort. Of course, you must also determine a price range for your home search.
In areas where foreclosures are rampant, you may have other options when it comes to seeking properties coming onto the market. You can ask your real estate agent to focus the search on properties in a certain subdivision, or even on a certain street to ensure you’re getting the location you want. You can aid in this search by continuing to gather information about the area. If you’re watching an area closely, you might be able to buy a home from the original owner before foreclosure proceedings begin, but in these cases, be aware that you may have to tackle the liens that are often on the properties as well.
Seeing the Home
When you have found a property that meets your criteria, try to get an inspection in order to determine its condition. The vast majority of foreclosed houses will be vacant, which usually makes it easy to tour the house and hire an inspector to determine what work is needed to bring it up to your standards. Occasionally the house you’re interested in buying won’t be vacant, and often the owner or renter isn’t too happy about leaving. The occupants might have to be evicted, which will likely add time to the process; and then there is a chance that when they leave they will damage the house.
Even if there is no intentional damage, many properties that have undergone foreclosure spend years in bad states of repair. Often, the previous owners of foreclosure properties, struggling to make mortgage payments, didn’t have funds to perform much, if any maintenance. There are often substantial cosmetic repairs and replacements needed. In some cases, there are major structural problems as well, as a result of years of neglect.
In many cases, even if you get an inspection, you won't be able to get agreement for any improvements to be paid for. Foreclosed homes often are sold "as is"; but knowing what improvements are needed ahead of time, will almost certainly be worth the effort, and help you to make the right decisions about the property.
If you’re looking for a property in really good condition, plan on a more difficult and lengthy search.
Making an Offer on a Foreclosed Home
Occasionally there is flexibility on the price of a foreclosed home, but with the already reduced listing price, there is usually not much room for negotiating when it comes to price. Unless the home is priced higher than the comparable sales in the marketplace, plan on paying close to the asking price. Your real estate agent can help you determine these values.
If you are unable to get an inspection before making a contract offer, be sure any offer you make is contingent on a satisfactory home inspection; that way you’re covering yourself for any surprises in the event there are significant problems that don't show up with a tour of the home.
Once you’ve gotten preapproved for the loan, found the house, and made an offer, there will be a wait for a response from the lender that now has possession of the house, which can take longer than a non-foreclosure transaction would take. Additionally, in some cases, you might be competing against cash investors with deep pockets and intimate knowledge of the process who plan to resell or rent the house, which could further delay a decision.
If the lender does decide in your favor, it often wants to get the property off its books as soon as possible, so you may have to move quickly in closing the sale.
And finally – hopefully at a bargain price – the house is yours.