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Decide Whether Buying a Foreclosure is Right for You
Buying a bank-owned home is a bit different than buying a house from a traditional seller. Because it’s a foreclosed home, there’s usually only one real estate agent: yours.
Buying a foreclosure can be a lengthy process, and while you may want to include foreclosed homes in your search, unless you are a property flipper or have some prior experience buying homes, it may not be wise to narrow your search to only bank-owned properties.
On the other hand, foreclosed homes are often priced competitively. They have gone through the short sale process, are owned by the bank, and the bank just wants to recoup some money.
Foreclosures are Sold As-Is
A major factor that you must account for in buying a foreclosed home is that it is sold “as is.” There is little-to-no negotiation possible. You are dealing with the bank, remember, instead of a seller who might provide wiggle room. The home may be pristine, or in need of minor repairs. This may not cost you much in the long run, and could result in a great purchase.
In other cases, there may be holes punched into the wall, cement poured in the toilets, and appliances might be in dire need of maintenance. You probably won’t be able to negotiate the price down to compensate for these repairs, hence being sold “as-is.” In either case, you can usually expect to have to pay extra after closing on the home to cover necessary cleaning, repairs, or remodelling to get the home move-in ready.
Find a Real Estate Agent and a Lender
Foreclosure purchases, as mentioned, can be more complicated than traditional home buying, so it helps to arm yourself with experts. There are some agents or real estate attorneys who specialize in foreclosures you’ll want to consult. They can help you through the process of buying a foreclosed home. At the same time you are finding a real estate agent, you’ll also need to apply for pre-approval on a mortgage. While this is normally advantageous in a traditional situation, it’s necessary to purchase a bank-owned home.
Real Estate Agents and Foreclosures
If you are set on buying a foreclosed home, it’s best to have a real estate agent who is well-versed in bank-owned homes. They should have a good relationship with the banks and the banks’ agents, known as the “real estate owned” or REO department, and may potentially have access to listings that have not officially posted to the database yet.
Contracts for buying a foreclosed home can also be different than a typical contract. Having an experienced agent can make this process smoother and quicker.
Hiring a foreclosure attorney can also help. While real estate agents may have some knowledge of local foreclosure laws, they are not lawyers, and having an expert on hand will help should the buying process hit any snags. A real estate lawyer will be able to give you actual legal advice, while a real estate agent cannot.
Getting a Mortgage to Buy a Foreclosure
While the broad steps of getting a mortgage for a foreclosure are largely the same as with a traditional sale, there are a few differences. The main one is that you’ll need a pre-approval letter, which can help determine how large of a mortgage you can afford. This proves to agents, who might otherwise be busy, that you are serious about buying a home. If you are simply paying in cash outright, there is no need for a pre-approval letter.
It’s worth noting that you do not have to get the pre-approval from the bank that owns the home. In fact, they may not even give you a pre-approval. The banks, after all, are not going to cut you a break just because you are buying an asset from them. The bank’s REO department, after all, are not loan officers
There’s also a lot of paperwork on the bank’s end. It’s a bureaucratic process, now that the bank owns the property, and that means a lot of signatures. You may not get a response to an offer immediately. Be patient.
Just like buying a traditional home, it’s much harder to complete the process with low or no credit. It may be worth repairing your credit first rather than trying to buy a house if your credit is too low.
Do Your Research
Knowing the basics can also help speed things along. Study local foreclosure laws in advance, even if you intend on hiring a real estate lawyer. Knowing the jargon will help, as will knowing the overall process. While negotiations are rare in purchasing bank-owned homes, having knowledge could give you an edge above the competition, and could open up small negotiations.
You’ll also need “comps,” or comparable houses, in order to get a feel for what a good price on the house will be. It’s best to see how other houses in the neighborhood or nearby neighborhoods are selling. Seeing the price of comparable homes will let you know how much you are really saving by getting a foreclosure, and how large of a mortgage loan you can get to help cover repairs, if necessary. Combine with with your pre-approval, and you will have bargaining power if you need to fight the bank on the price. Your agent will be able to help you obtain comps.
Get a Professional Inspection of the Property
You also need to research the property. It is absolutely essential that you not skip a professional inspection of the property.
The house might have gone to foreclosure as a purely financial issue, but prior owners can be vindictive in what they perceive as being forced from their home. They may have left damage, or let the home fall into disrepair.
There may be issues you need to know about that are not immediately obvious. You should have a budget set aside for potential repairs. This can be part of the hidden cost of buying a home, foreclosed or not.
Think Long Term and Budget Accordingly
Essentially, using your research, do the math and determine if the house really is a good deal or not. Long-term, will you have to fix the AC or water heater, or have they mostly been maintained? Is it a fixer-upper, or a true money pit that will cost far more than it appears on the surface? Get estimates for any repairs before committing to buying.
Any repairs needed could also affect your move-in date. Foreclosures are often vacant, and you can move in as soon as the paperwork goes through, but necessary repairs might delay this. Factor this in when you are deciding whether to buy the house.
The final question you should ask yourself is whether the short-term savings on the house are worth the mortgage combined with any repair and renovation costs. Is the house in a good neighborhood? Is it a newer house that is likely to appreciate in value if brought back up to good condition? If you can answer these long-term questions adequately, then you are ready to take on the challenge of a foreclosed house.
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