Since the 2008 financial crisis, buying foreclosed homes has become simpler. The explosion in foreclosures, fueled by widespread subprime lending, led to increased availability of properties after the Fannie Mae and Freddie Mac collapse.
While foreclosures are far fewer than at the height of the mortgage crisis, the policies put in place in the aftermath to accommodate the large volume of available properties remain. Those seeking to invest in real estate can pursue a foreclosed home with less red tape.
What is Foreclosure?
Foreclosure is the act of taking property away from a borrower when they fail to keep up with their mortgage. Not making payments on a mortgage, known as mortgage delinquency, is currently at 3.4% in the United States.
What Are the Types of Foreclosures?
Foreclosure occurs when a borrower misses one or more mortgage payments. During pre-foreclosure, the mortgage lender notifies the borrower that they are in default. Federal regulations require a 120 day delinquency period before the lender can officially start the foreclosure process.
At this stage, the home isn’t offered for sale at auction, and the owner can sell the property. Selling the property can help the owner avoid the rest of the foreclosure procedure and the damaging effects on their credit history.
As a prospective home buyer, you can find foreclosure listings in city and county courthouse buildings and on websites that list pre-foreclosure properties.
A short sale is when a homeowner struggling to make payment submits a proposal to the mortgage lender to sell their home for less than the loan balance. This sale puts the seller in a position to avoid foreclosure if it goes through.
Sheriff’s Sale Auction
Sheriff’s sales are public auctions that happen after the mortgage lender notifies the borrower of default and the grace period passes. When homeowners cannot keep up on payments, an auction ensues. Auctions sell foreclosed home quickly to repay the lender.
Sheriff’s sales get their name from the fact that local law enforcement manages these auctions, often in front of a city courthouse. They list the auction items in local newspapers, and on the day of the sheriff’s sale, the highest bidder secures the home.
The lender’s goal is to sell the property quickly to avoid holding onto the property. Depreciation and the prospect of not making money on the property while having to pay taxes and insurance make selling the home a priority.
After the foreclosure auction, homes that revert to the bank are considered real estate-owned (REO) properties. Banks have an REO department that attempts to sell the house like a conventional real estate agent.
If an owner purchases their home with government-guaranteed loans from the Federal Housing Administration or the Department of Veteran Affairs, ownership of the house passes to the government when it goes into foreclosure.
As a prospective home buyer, you can seek to buy government-owned properties by contacting brokers who work for the federal agency that holds the home.
Benefits of Buying a Foreclosed Home
The most appealing reason to buy a foreclosed home is the price discount and instant equity you may have in the house. Foreclosed homes may cost significantly less than similar properties in the area. This presents an opportunity for real estate investors to purchase a home and sell it at a profit without an outlay for repairs.
Risks That Come With Buying a Foreclosed Home
Foreclosed properties carry an inherent risk of buying a home from a financially distressed previous owner. If the owner falls behind on their mortgage payments, they will likely not be paying for all necessary maintenance and repairs. A simple home inspection may not reveal hidden issues that could cost you additional money. You may need to budget for repairs and other expenses.
Purchasing a foreclosed home can be a slower process. It may take longer for the lender to approve the sale or for title issues or tax liens to be resolved before the sale is closed.
The lower price point of foreclosed homes also attracts more interested buyers and house flippers, resulting in a bidding war. This may drive the home’s price up, causing you to miss any savings.
Ways to Buy a Foreclosure
Buying a foreclosed home may seem risky or intimidating, but you can maximize your return while minimizing risk with careful research and paying attention to details.
Purchasing from the Homeowner
In the short sale phase, the homeowner still owns the property. The looming foreclosure places pressure on the owner to sell. They must get the lender’s permission to sell the home at a price that is less than the amount they owe on the mortgage.
A homeowner that still owes $200,000 on their mortgage might try listing the home at $180,000 despite leaving them short $20,000 if the sale were to close. As a potential buyer, the factor working in your favor, in this case, is the bank’s goal of getting the property off their books.
If the $20,000 loss on the home loan is less than the money they will pay to maintain the property while seeking a buyer down the road, the bank may agree with the sale.
Buying at an Auction
Buying at an auction is a quick way to buy a foreclosed home but requires you to have cash on hand. Among the risks associated with buying at an auction, the most prevalent is a lien on the property’s title and the potential for necessary expensive repairs. Doing your due diligence on the home reduces your risk and boosts your chances of finding a great deal.
Buying from the Bank
When buying from the bank, you will most likely be dealing with a local real estate agent who works with the lender. Buying at this stage absolves you from worrying about liens as banks will clear them and evict the previous homeowner before putting it on the market.
Buying from the Government
Buying a foreclosed home from the government is similar to buying from the bank, except that the houses are usually sold “as-is.” This means that any repairs that need to occur are the buyer’s responsibility. Government-owned homes may require you to place a bid or offer before inspecting the house.
Make an Informed Foreclosed Home Purchase Decision
Buying a foreclosed home can be a financially savvy move. Homes offered below market value mean more neighborhoods are in your price range, and they’re a good choice for someone looking for a home renovation project. Banks are more willing to make deals to minimize their potential losses.
If you’re interested in a foreclosed home, you also need to be aware of the risks. Having the property inspected, getting an appraisal, and working with real estate and mortgage professionals can help you avoid problems.
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Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.