Of course, you want to find a great deal when buying your new home and some look to foreclosures as a way to get what they want within their budget. There can be a number of advantages to this over going the traditional route with an owner seller, but you might feel a bit intimidated by the process. No need to let that stop you from making a great decision, we’ll help walk you through what you need to know about buying a foreclosed home.
What does foreclosure mean?
Before you delve into the process, it’s always good to know exactly what you are dealing with. When a home is in foreclosure, it means that the current owner has either fallen far behind on their mortgage payments or completely defaulted on the loan. This leaves the bank with a home that they technically own but no one paying the loan on it. Banks aren’t in the business of holding onto homes, they are in the business of making money from loan interest. That doesn’t happen when no one is paying the loan.
Why is foreclosure to a buyer’s advantage?
In order for the bank to recoup the investment, they are eager to sell. This gives you, the buyer, the advantage. Banks are often open to price negotiation and they may even sell a home at a price that is somewhat below the market value, allowing you to grab a deal you might not otherwise get.
So, is buying a foreclosure the best way to go?
It might be, but it might not be. It’s not necessarily the right thing for every buyer or circumstance. There are pros and cons, risks and rewards to consider and weigh when deciding if it’s the right move for you. Competition can by high when buying foreclosures, and often you need to move quickly. This means you must be decisive and have your financing ready to go.
How do I go about buying a foreclosed home?
That is an excellent question as the process differs somewhat from traditional home buying. Here are 5 crucial steps to buying a foreclosed home.
1. Enlist the help of an expert real estate agent.
Not all agents are experienced in dealing with foreclosures so it’s important to find an agent that can seamlessly guide you through the process. These agents have specialized training in this area, being listed as either a Certified Distressed Property Agent (CDPA) or having Short Sale and Foreclosure Resource (SFR) credentials. You may be able to find a certified agent on websites with foreclosure databases.
2. Find the right lender and get pre-approved.
The reason that this isn’t listed first is because it can get overwhelming choosing the right lender, especially in the case of foreclosures. An experienced agent will be able to help you find a lender that is right for you and can help you will the process of getting pre-approved.
Once you are pre-approved, having it in writing (a pre-approval letter) is a very important factor. It shows proof that you have financing with a lender. That letter can help you move quickly once you find a home. It can mean the difference between closing the deal and losing out to another buyer who can show that they have financing ready.
3. Get a comparative market analysis.
In the real estate biz, they often use the term “looking at comps”. All this means that they are looking at the market value (and a combination of other factors) of similar homes in the neighborhood, including ones that have recently been sold. Before you bid on a home, it’s a smart idea to not only know the value of the home but others like it. It will help your real estate agent guide you in your decision of how much to offer.
4. Foreclosures are an “as-is” deal.
With a traditional owner-seller you can often negotiate certain home repairs into the deal. Not the case with foreclosures, what you see (and even what you don’t see) is what you get. Have a home inspector come in and give you a realistic analysis of what repairs are absolutely necessary now and what may need to be done in the near future.
This is something that needs to be kept in mind and factored in when making your bid. Will you have enough money to make needed improvements? Are their serious issues that would be difficult or extremely costly to remedy (like lead paint, termites, structural damage, etc.)?
5. Making an offer to the bank.
This can be a bit tricky. The bank may let the house go for a steal, or they may stay firm to their stated price. How do you know when to bid low or when to make a stronger offer?
Take a look at the other foreclosures in the area. Are they selling quickly? Is there a lot of competition to buy foreclosures? Is there a high chance that multiple other bids will be placed? If the answer is yes to any of these questions, beware of bidding too low—the bank may not even consider your offer in those cases (why should they accept less when there are others clamoring to pay more?). Is it likely that there will be cash bids submitted?
If the answer is yes to any of these, you may need to make a more competitive bid. Your real estate agent will help guide you to making the best possible offer while letting the bank know that you already have your pre-approval in hand, and you are ready to buy now.
There is always a chance that you won’t get the first house you make an offer on. Try not to get discouraged. Continue to work with your agent and be patient in order to find the house that is right for you and your budget.