The housing market has a wide range of options to figure out where to buy your next home. One type of home that you should consider to buy is a home that faces foreclosure. Many people choose this type of option because of homes who face foreclosure. Typically, homes that face foreclosure are listed at a much more affordable price. The price can be lower than usual, but there is a catch that you need to keep in mind. The catch is that you do not know how well the property was maintained; it could be a mess. There are a lot of questions that you might have about buying a home that faces foreclosure. This article can provide a little clarity on all your questions.
Foreclosure 101: Everything You Should Know
The process of foreclosure takes place when a residential property is taken over and owned through a bank or a lender because the borrower was not able to repay the debt. A lender could be a mortgage firm and a borrower is typically the person who lived on the property. Once the borrower moves out of the property, the bank returns the property to the market and tries to sell it. That way, the bank can cut their losses from the borrower’s lack of ability to pay back the mortgage.
Homes that face foreclosure, or real-estate owned homes (REO), are usually put up for sale at a discounted cost or the bank offers the homes at auctions. Typically, households who cannot repay their property loans do not have the funds to pay for the upkeep of the property. This is why you should expect a lot of home repairs when you buy a home that faced foreclosure.
Why are Foreclosed Homes Cheaper in the Market?
The main reason that potential homebuyers consider properties that face foreclosure is the reduced price. These discounted prices are significantly less than their comparable counterparts. You will find that these properties also come with additional reduced costs. This could include a reduced down payment, lower interest rates, and fewer closing costs. Additionally, homebuyers prefer these types of properties because it takes advantage of the premise that the sellers of the property are financially struggling. As an example, a home that is currently in pre-foreclosure could mean that the sellers are desperate to get rid of the property. In this case, the homebuyers have the upper hand while negotiating costs, since the sellers are desperate to get the property off their hands.
If the property is seized from the current owners, then homebuyers have a bigger advantage. This is because these types of properties are sold quickly since no one wants to deal with them. But, another reason these homes are cheaper is because of the fact that they are sold in their current condition. If a person is struggling to pay off their mortgage, then they will probably struggle to properly maintain the property. In case that the property needs repair, that will go into the entire cost of the home. Some of these potential repairs can lead to you not buying the home.
How to Find a Foreclosed Home
If you want to find a home that faces foreclosure, then you might not find it as direct as you think. The best place to start looking for foreclosed homes is through multiple-listing service (MLS) websites, newspapers, and online searches. When you review these properties, then you need to be vigilant for the foreclosure mentioned. You might not find that fact about the property in the headline. But, you can find it in the property description. Additionally, you can reach out to a local real estate agent and find out about any opportunities that they can know about.
How Do Foreclosed Listing Work?
When you are looking for different homes that face foreclosure, you will probably come across five different types of foreclosures. These five types are:
- Pre-foreclosure homes
- Short sales
- Auction Homes
- Government-owned homes
- Directly from the bank
Pre-foreclosure homes are the start of the foreclosure process. This is when the lender files a notice of default on the property and notifies current borrowers. Pre-foreclosure takes place before the property is listed for sale at an auction. During the pre-foreclosure stage of the process, the homeowner will receive a letter that stated that the foreclosure process will start. It is common to find property owners trying to sell their residence as a pre-foreclosure property. For the homebuyer, it is a benefit to look into pre-foreclosure properties because the owners are eager to sell the property as soon as possible to repay their loan.
It might sound nice, but finding pre-foreclosure homes can be tough. If the current homeowners are able to sell their property during the pre-foreclosure phase, then they might be able to avoid the foreclosure process. You will want to search for properties that you are interested in and see if they are listed as properties facing pre-foreclosure.
When the lender accepts a lesser amount for the home than the amount for the mortgage, it is a short sale. Typically, lenders agree to a short sale when borrowers do not need to be in default. But, if a lender agrees to a short sale, then the current owner will need to provide documents that prove they are financially struggling. This could include loss of employment, or proof of financial hardship. When you are looking for properties that face foreclosure, short sale properties are likely listed as pending bank approval properties.
When you purchase a short sale home, you find that it is similar to the standard home buying process. The only difference is that you will notice that the language in the contracts is not the same. You will find that the short sale purchase process can take longer than a standard home buying process. This is why it is important to think about it when you review your options.
Off to the Auction
Once the grace period expires for the borrower to repay their mortgage after they are notified, a sheriff’s sale auction is the next step. This auction’s purpose is for the lender to get a payment as soon as possible, since the loan is in default. You will find these auctions in several environments. Typically, you will find these auctions in front of an official building. Also, you will find signs advertising the auction, as well!
Auctions are a great place to locate foreclosed homes to buy. But, there is more to the art of homebuying than meets the eye. Firstly, you will be at a disadvantage during an auction because you will purchase the property without a thorough examination. Knowing about the property you want to buy is important. If you want to get an estimate of your potential expenses for the home, then you should examine the property first.
Sometimes, you will be able to see the general condition of the property during the auction. But, that is not usually enough to assess how much you will spend on the home, in terms of repairs. Nonetheless, you need to do whatever you can to get as much information as possible about the house before buying it.
Direct Purchases from the Bank
When a property cannot get a sale at the auction, it will go back to the bank. This is when the property becomes a real-estate owned (REO) property. In the end, you can save yourself the trouble of going to auctions and purchasing the property directly from the bank. You should keep in mind that since you are purchasing a property that faces foreclosure, then you will need to acquire it in its current condition. Additionally, you might not have a lot of information on the property’s condition or damage with homes that face foreclosure. But, when you approach a bank or a mortgage company, you could have more time to thoroughly inspect the property.
Properties That the Government Owns
If a property is purchased with a federally-backed loan like a FHA loan or VA loan, then it is repossessed by the government and not a financial institution. Once the government possesses the property again, brokers that the Federal Government employs sell these properties. If you are considering buying a property that the government owns, then you will need to reach out to these brokers. Potential homebuyers can look through options online on the U.S. Department of Housing and Urban Development (HUD) website.
Cons of Purchasing a Foreclosed Property
There are a lot of advantages to buying these types of properties, such as the cheaper costs. But, there are also some disadvantages that come with purchasing a property that faces foreclosure. These disadvantages include:
- Problems with the property
- Hidden costs
- Slow purchase process
- Competitive markets
Problems with the Property
When you purchase a property in its current condition, then you will need to know that there is a lot of risk involved. There risks could come from the major repairs you will need to make. Additionally, there are minor repairs that you need to handle as well. You should also keep in mind that the previous homeowners can be uncooperative. If a person is dealing with foreclosure, then they can take it out on the property before the bank repossesses it. This means you will be responsible to clean up the mess they made.
These properties could sound too good to be true, which is why you need to deal with the hidden costs that could follow. Hidden costs such as liens or back taxes can lead to more expenses for a potentially damaged home. So, be careful about the hidden costs that could follow a home that faces foreclosure. You need to keep in mind that all money needs to be repaid before the buying process is finalized. Typically, the financial institution is trying to get rid of the property at the auction, which means that they can handle these hidden costs. You will still need to keep it in mind when you are looking through these types of properties.
A foreclosure typically means a lot of paperwork and a slow process. There are so many roadblocks that you could run into during the homebuying process. As an example, if the property contains a lot of damage, then you will find a low home appraisal value. The low home appraisal value can lead to having a harder time for you to secure funding. Also, this could make the process take even longer than usual.
If there is a home that comes at a cheaper price, then it will probably attract several homebuyers. This means that there is more competition. When there is high demand on a property, this can lead to bidding wars on the property. If a bidding war continues for a long period of time, then the property could become overpriced. You should submit several bids at the same time, if you want to buy a property that faces foreclosures. It can be discouraging, if another home buyer provides a higher bid. Instead of letting it get you down, you should keep looking for foreclosed properties that are up for sale and put the highest bidding spot.
Conclusion: Do You Want to Purchase a Foreclosed Home?
In conclusion, you should think about buying a home that faces foreclosure since it is cheaper than standard homes. However, you need to keep in mind that these properties might have costs that you didn’t know about and it might not be easy to find homes that face foreclosure.