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- Foreclosed properties are often sold at a significant discount, but they're sold as is.
- You can find foreclosed properties for sale on online listing sites or in your local newspaper.
- Foreclosures may need extensive repairs or have costly title issues that the buyer will need to deal with.
Home prices have been on the rise for years and, coupled with higher mortgage rates, they have left many consumers looking for more affordable ways to buy a house.
Many home shoppers look at foreclosures as a great way to save money on a house, but buying a foreclosure isn't always as cheap as it's cracked up to be.
Though distressed properties often do come at significant discounts, there are costly secrets that can be hiding behind the walls of these homes — things like back taxes, foundation issues, and other problems that can be expensive to fix.
In spite of the risks, many who purchase foreclosures are able to find perfectly habitable homes for less than what they'd have spent on the regular market. If you're thinking about buying a foreclosed home, here's how to do it.
Steps to buying a foreclosed home
Buying a foreclosure is a little different than the typical homebuying process, so make sure to do your research before diving in. You can expect to go through the following six steps if a foreclosed home is on your radar:
Step 1: Find foreclosure listings
Wondering how to find foreclosed homes for sale? Often, you can browse foreclosed properties in your area using the same methods you would to buy a regular home, such as online listing sites like Zillow. You can also look at homes that are in pre-foreclosure or are being sold as a short sale.
Foreclosed properties owned by the government-sponsored enterprises Fannie Mae and Freddie Mac can also be found online. Some of these homes may have had certain repairs completed in order to make them eligible for financing. Fannie Mae's program for Fannie-owned foreclosed properties is called HomePath, while Freddie Mac's is called HomeSteps. To view for-sale foreclosures owned by HUD, you can visit the HUD Home Store.
You can also check your local newspaper for notices of foreclosure auctions.
Step 2: Get pre-approved for financing
Getting a mortgage pre-approval is a critical step in any homebuying process — foreclosed or not. With a pre-approval, you'll know how much you can potentially borrow and can set the price range for your house hunt. You can also include your pre-approval letter when making offers on properties.
Depending on the condition of the properties you're eyeing, you may have access to the same types of financing you'd have with a regular home purchase, including conventional, FHA, VA, or USDA mortgages.
If the home needs repairs, a renovation loan might be a good option. With this type of mortgage, you can combine your anticipated renovation costs with the sales price into a single loan.
Conventional renovation loan options include Fannie Mae's HomeStyle Renovation mortgage and Freddie Mac's CHOICERenovation mortgage. For FHA borrowers, FHA 203(k) loans can fund both minor fixes as well as major structural repairs.
If you intend to purchase a home at auction, you won't be able to finance the property — at least upfront. Auctions usually require cash payments within 24 hours.
Step 3: Research the property thoroughly
Once you find a property, digging into its history is vital. You'll want to do a title search to ensure there are no liens against the property.
A home's title refers to who has ownership rights to the property. If a property has clouds on the title, it means that there's some sort of claim attached to it. This could include things like unpaid property taxes, a mechanic's lien, or issues with who actually owns the home.
Title issues can be costly to resolve. For example, if the previous owner had renovations done on the home that they never paid for, the contractor may have put a lien on the property. If you then buy the home, you'd be legally responsible for paying the contractor.
You should also check public records for any boundary disputes, construction permits, or other files on the home. These can all give you an idea of what potential issues could be lurking below the surface.
Step 4: Get an inspection
When you buy a foreclosed home, you're getting it "as is," meaning you won't be able to go to the seller and negotiate repairs for any defects you find. This means that getting a home inspection is vital, because it will give you an idea of the amount of work the house needs, and how much money you can expect to spend fixing it up.
Not all foreclosures have significant issues, but if the property has been abandoned or wasn't properly maintained, some of its major components could need fixing up. If it has more significant issues, like damage to the foundation, you'll need to consider whether the money you'll spend repairing the home is worth what you'll save by buying a discounted property.
"The main challenge is the condition in which you may find the property, including hidden problems like foundation issues, deferred maintenance, inoperable systems, among others," says Kofi Nartey, founder and CEO of real estate firm GLOBL RED. "My recent buyer of a foreclosure had thousands of dollars of deferred maintenance to deal with, as well as general updating and repairs."
The problem with buying a foreclosure is you might not get the chance to order a home inspection. If you're buying the home at auction, you won't be able to get the home inspected. This is extremely risky, since you'll have no idea what condition the property might be in.
When buying an REO property — one that's owned by a bank or lender — you may get a chance to have an inspector look at the home. You still won't be able to negotiate repairs, but as long as you have an inspection contingency in your contract, you can walk away if you decide issues uncovered by the inspection are more than you can handle.
Step 5: Attend auction or work with an REO real estate agent
Depending on the type of foreclosed home you're buying, you may need to attend a public auction or sheriff's sale to get it. As with any auction, you'll need to make a high enough bid to get the home. You may also find yourself bidding against experienced investors and home flippers.
If you win, you may need to wait a little while before you officially get the home, since many states offer homeowners a "redemption period," during which they can still reclaim their home even after it's sold at a foreclosure auction. You might also want to consult an attorney, as you may need to go through eviction proceedings to remove the previous owners if they refuse to leave voluntarily. Depending on the laws in your area, you may also need to go through the same process if the property has squatters. An attorney can advise you on how to go about these processes in your area.
If you're buying a home directly from a lender or bank, you should contact an REO agent — a type of real estate agent that specializes in these properties. They can help you put together an offer and walk you through how to buy an REO property.
Step 6: Closing process
The closing process will depend on what type of property you're purchasing. If you're buying an REO home that's still owned by the bank or lender, you may go through the typical closing process with a mortgage lender. This will require signing closing documents and paying for your down payment and closing costs.
If you're buying a home at auction, you will typically need to pay in cash within a certain type period of submitting your winning bid (usually 24 hours).
FAQS
With foreclosed homes, financing options depend on the type of property you're purchasing. If you're buying an REO property that is owned by a bank or lender, you may be able to use a mortgage loan. If you're buying a foreclosed home at auction, you will typically need to pay in cash.
Yes, most foreclosed homes are sold in as-is condition, and you cannot negotiate repairs with the seller. If possible, you will want to have a foreclosed home inspected before purchasing it — though this isn't always an option.
You don't necessarily need a real estate agent to buy a foreclosed home, but it can be very helpful — especially if you choose an agent with foreclosure or REO experience.
You can often find foreclosed homes for lower prices than move-in ready ones. Just be prepared for repair costs, as many foreclosed properties need significant updates before they're habitable. There can also be a lot of competition for these properties from investors and home flippers.
Buying a foreclosed home comes with plenty of risk. There could be liens against the property or back taxes owed on the home, or the home could be in poor condition and need significant repairs. Doing your due diligence is key with these properties.
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Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.
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