Buying a foreclosed home
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When shopping for a new home, everyone wants to find a bargain. One possible option to get a bargain is to buy a foreclosed home at a low price.
It is not uncommon to find foreclosed homes on the market today. In fact, the 2019 U.S. Foreclosure Market Report showed 493,066 foreclosure filings in that year. Buying a foreclosed home adds some complexities that do not come with buying non-foreclosed homes.
Before you jump in and pursue a foreclosure, there are some critical things to consider. In this article, we will cover everything you need to know before you buy a foreclosed home.
What is foreclosure?
A foreclosure happens when a homeowner does not make their mortgage payments and the lender takes possession of the home. Since the mortgage lender paid for the home and the homeowner is obligated to pay them back, the lender can take possession of the home if they are not paid in order to recoup some of the loss in a foreclosure sale.
Unfortunate life circumstances can lead to the inability to make the required mortgage payments, such as job loss, illness, death of a spouse, and divorce, to name a few. Because foreclosure laws vary by state, the foreclosure process can take a few months or it can last for several years.
Bank-owned versus real-estate owned foreclosures
Foreclosures are listed one of two ways; bank-owned or real estate-owned. Although they may sound separate, bank-owned or real estate-owned foreclosures are both technically owned by the bank. The type simply indicates what stage of the process the foreclosure is in.
When you see that a foreclosure is listed as bank-owned, it typically means the bank is trying to sell the property to the public directly. A common way this is done is through public auction. When an auction occurs but the property does not sell for the bank’s minimum bid amount, the property may then become real-estate owned.
A real-estate owned foreclosure is still owned by the bank. However, in this case, the bank is trying to sell the property through a real estate agency. This is when you and other potential buyers may find the property listed on real estate sites like zillow.com or redfin.com among others.
Why foreclosed homes are cheaper
When it comes to why foreclosed homes are often cheaper than homes that are not under foreclosure, there is a simple explanation. When a non-foreclosed home is sold, it is typically listed at or around its fair market value.
For example, let’s assume you are selling your home and you owe $50,000 on your mortgage. If the fair market value of your home is $200,000, you will most likely list the home for at or near $200,000.
On a much different note, when a foreclosed home is sold, the bank is simply trying to recoup some of their losses. Using the same example, if you owe $50,000 on your mortgage and it forecloses, the bank is likely to sell the home for far below its fair market value because their primary goal is to pay themselves back what they’ve lost. The foreclosure will typically be priced to sell quickly and cover the outstanding balance on the mortgage.
Another reason foreclosed homes are often cheaper is that foreclosed homes have sometimes been neglected, which decreases their fair market value.
Risks of buying foreclosed homes
Buying a foreclosed home comes with a healthy number of risks to consider. The following are a few of the aspects to consider.
Home or property ownership issues
Foreclosed properties are often neglected. Sometimes the properties are sold “as is” but even if they are not, banks that have priced the home at well below the fair market value are unlikely to invest further into the property by making improvements. Since these homes are often either neglected or left vacant for long periods of time, they can be in pretty rough condition and an investment of time and money from the new owner.
For this reason, a home inspection is critical. Unlike purchasing a standard home, where the inspection happens throughout the loan process, it may be wise to have an inspection done on a foreclosed property prior to even considering investing.
Another consideration are back taxes or liens owed on the property, which can result in hidden fees to dispute or resolve title issues. Things like this can affect the homeowners insurance process later as well.
Lengthy closing process
The closing process on a foreclosed home may be incredibly slow for a couple of reasons. If there are a lot of issues with the home that are discovered during inspection, that can create delays. If those issues negatively affect the appraisal value, that can cause additional delays to resolve.
If your foreclosure is one of multiple foreclosures being handled by the bank at one time, response time can be slower as well — an issue not as common with standard home sales.
In some cases with foreclosures, competition can be very high. If the foreclosure is in good shape and priced well, you will likely be competing with other eager buyers. This competition can drive up the price of a home you thought would be a good deal.
How to find foreclosed homes
If you’ve assessed the risks and have decided that purchasing a foreclosed home is a good option for you, there are some things you can do to prepare for finding home options.
Reaching out to a licensed real estate agent is a great way to start, as it costs you nothing up front. As a home buyer, the real estate agent fees are paid for by the seller who is, in this case, the bank.
A real estate agent matches people and homes for a living. If your agent knows what you are looking for, they can help to ensure you’re one of the first to know when the right foreclosures hit the market, whether it’s an auction or a regular property listing. They also help you negotiate the best deal and guide you through the entire buying process.
If you prefer to do your own research, setting filters on sites like Zillow and Trulia to alert you of any foreclosures listed that meet your criteria is one option. Since foreclosures are public record, you can also check your local newspaper, bank websites, and government websites like The Federal Housing Administration for potential foreclosure listings.
Buying a foreclosed home
If you understand the risks, buying a foreclosed home can be a great opportunity to get more home value for your money. There are some situations in which a foreclosure makes more sense and times when it does not. If you’re a buyer with the capital to cover surprise expenses and have the time to spare for a potentially lengthy closing process, a foreclosure may be a good fit for you. However, if you’re on more of a tight budget or need to buy and close quickly, a foreclosure may not be the best choice.
How do I get a good deal on a foreclosed home?
Once you’ve decided to purchase a foreclosed home and have found a potential listing, here are the best ways to ensure you get a good deal.
As with finding the best listings, a real estate agent may be your best shot at a good deal as well — especially if they are familiar with the area and have local knowledge of home values and neighborhoods.
Another way to get a great deal is to look for hidden treasures. Homes in neighborhoods with high appreciation rates can grow the value of your home quickly and offset the money you may invest up front for repairs and purchase price. This is especially true if you can find a cheaper, rundown foreclosure that would accrue value after repairs just being located in a prime neighborhood.
In addition, if you are able to pay cash for the home, this can be favorable to a bank because they can then sell quickly without waiting for your mortgage process. This can create an opportunity to negotiate a better deal on the home with the bank.
Your property is under foreclosure
Buying a foreclosed property is one aspect of the process, but what if you are the homeowner of the property being foreclosed?
Implications of foreclosure
- If you have a second mortgage or home equity loan in addition to your first mortgage, the foreclosure may not eliminate that debt for you if the bank is not able to recoup those losses.
- If your mortgage debt is forgiven through foreclosure, meaning that the bank takes back the property and you are no longer responsible for the debt, you may owe taxes. Be sure to speak with a tax professional to know what, if anything, will be outstanding.
- Foreclosures appear on your credit report for up to seven years. This typically has a negative impact on your credit score and can affect future borrowing abilities. Work to improve and strengthen your credit in every other way that you can to help compensate.
- If there is a surplus above the outstanding mortgage amount on the sale of the foreclosed home, you may be entitled to it.
- You might still need to pay for homeowners insurance during the foreclosure process.
Insurance and foreclosure
Maintaining your homeowners insurance during foreclosure may save you some money in the long run. During the foreclosure process, there may be damages to the home whether by weather, natural disaster, or visitors. This damage will affect the value of the home, even if it’s under foreclosure.
Financial expert Laura Adams reminds us, “If you’re a homeowner facing foreclosure, it’s critical to maintain your home insurance. Even during a bank foreclosure, you’re still responsible for structural damage or injuries that happen to people who visit the property.”
If you’re paying the insurance premium through an escrow account with the mortgage lender, the lender may continue making those premium payments even if you do not. In that case, they will add those costs to your outstanding amount owed.
If you pay the homeowners insurance premium independently, it will be your choice whether or not to continue paying the premium. Check with your insurance company to find out when the coverage will cease in relation to when the mortgage payments cease.
“When a mortgage lender discovers that you no longer have homeowners insurance, they must purchase a policy to protect their financial interests. However, you’ll be responsible for reimbursing the lender’s premiums, which could be more expensive than your previous policy. So, until a foreclosure process is complete, don’t let your insurance lapse,” Laura encourages.
- Buying a foreclosed home can be an opportunity to get a good deal.
- Before you consider buying a foreclosed home, research and understand the risks.
- Follow our tips and do your homework to get the best deal on a foreclosed home.
- If you are the homeowner whose home is being foreclosed, know your rights, and maintain homeowners insurance throughout the process as a safeguard.
If you go into the foreclosure buying process with the risks in mind, you may end up getting an incredible deal on a great home. This might take some time and lots of patience as you navigate through what can be a complex and lengthy process.
Buying a foreclosure is not for everyone though. It is important to go into your buying journey with an understanding of what your needs are, what you can handle financially, and how much time you have to give. Understanding these things will help you be a savvy buyer and avoid unnecessary risk and complication.