Everyone loves a good bargain. The truth is, homes are expensive. Just like people look for deals on retail products like jackets and flat screens, people love saving money on houses. One of the quickest ways to score a great deal on a home purchase is by taking advantage of the foreclosure market. Investing in real estate can be very rewarding, especially when you can land a huge discount on your investment. Purchasing a foreclosed home is a much easier process than buying a home from a regular seller. If you’re looking for a quick buy, you’ll definitely want to look at foreclosed homes.
What is a foreclosure sale
Foreclosure occurs when a homeowner fails to make payments on their house. Foreclosure is a legal process whereby the owner of the home forfeits the legal rights to the home. Once an owner has defaulted on their payments the lender then takes control of the home and attempts to gain back as much as possible. From there the home goes to a foreclosure auction. If it does not sell at auction, then the lending institution takes ownership of it and it becomes a real estate owned property, or an REO. In that scenario the home may be listed on an MLS or multiple listing services. As a result of the need to sell the home being foreclosed, the lender will list the price the house for a lot less than it is actually worth. This is where buyers can score big savings. For homes being sold at auction, the lender typically opens the bid at whatever is remaining on the loan.
Find a broker and get pre-approved
Like with any home purchase, the very first thing you’ll want to do is get pre-approved by a lender. Once that is done, begin the process of searching for a broker who deals directly with banks that sell foreclosed homes. Another tip is to search online databases of foreclosed homes. Look at local real estate listings too as often there are filters that allow you to see only foreclosed homes. Look for the letters REO as that indicates a property that is under the ownership of a bank. Sites such as Hubzu is a good tool for finding foreclosed properties and posts current online auctions.
Find an agent experienced in foreclosed homes
Another way that foreclosure sales are easier is that they typically only require one agent during the process. Be prepared to move quickly as foreclosure sales move at a very fast pace. When looking for an agent to represent you during this process, look for the designations; Certified Distressed Property Expert (CDPE) and Short Sales and Foreclosure Resources (SSFR). It is possible to skip this step and work directly with a broker in order to save commission fees. Banks hire their own brokers to deal specifically with REO properties. However, most buyers feel more comfortable when they have an agent directly working on their behalf.
Look at comps before making an effort
Before making any offers make sure to have your agent run a comparative market analysis. This helps you understand the recent sale prices of comparable properties, or ‘comps.’ When doing a CMA, your agent will typically look through the last 180 days and looks for factors such as the pace of home sales and tax assessment history.
If foreclosed homes in your area are selling quickly, be prepared to make the higher bid, remember, the price is likely already discounted. There’s no real way to tell what the bank’s bottom line will be, but usually foreclosure sales go very quickly. Remember, foreclosure prices are usually already discounted, weighing in significantly less than the actual value, so an offer that is too low may be seen as a non-started by the bank.
Get an inspection and find someone to help with repairs
With foreclosure homes, there’s a good chance that you will have to do some repairs. In a foreclosure sale, the buyer pays for any and all repairs. Since the home is owned by the bank in this case, there is no other party to do the repairs. Foreclosures homes are sold ‘as is.’ You will definitely want a thorough inspection of the house to know exactly what you’re buying. The bank does not make any guarantees regarding the condition of a foreclosed home.
Risk of buying a foreclosed homes at auction
One benefit to buying a house at a foreclosure auction is that there usually aren’t many bidders. With less people competing, the better your chances are of getting a great deal on the house. A downside to buying at a foreclosure auction is that in many cases the bank requires cash payments. Sometimes you may need to have the cash on hand before you even make a bid. Another downside is that there are no inspections for homes that go on auction. Almost all auctions require some form of earnest payment up front and often they are non-refundable.
Getting a great deal buying foreclosed homes
As previously noted, if the foreclosed home does not sell at auction, it then becomes an REO property. This is where people can get big savings on a home (provided they understand it will likely need lots of repairs). The main reason why REOs are priced lower than regular listings is because they often need work, typically so much so that they don’t qualify for financing. That alone clears out 75% of potential buyers which again, lowers the price. This is where an investor can swoop in and purchase a home way below the market rate and the home’s actual value.
Making an offer
Once you have worked with your agent to find a foreclosure home to buy, the next step is to make an offer. This process is similar making an offer on regular listings but involves more paperwork. When making an offer keep in mind that banks have a few requirements. First, you’ll need a pre-qualification latter before they even consider an offer from you. In many cases you’ll also be required to submit a copy of your earnest money check. Sometimes the check will need to be certified funds.
Note that while banks typically want to unload foreclosed homes quickly, that does not mean that you should make a low offer or expect them to take anything. The price will already be discounted and like any regular seller, the bank will want to get as much money as possible. Like with any sale, the amount below the listed price that the bank will take depends on things such as how long it has been on the market.
When done right, buying foreclosed homes can be an enormously rewarding investment. All real estate investments take time and effort. Foreclosed homes are a great way to find properties at discounted prices. This can be an especially fruitful market for people looking to do flips. As a note to fix and flippers, though your investment may be less, you may still have to do a lot of repairs, so be prepared to invest a little more into the fix before the flip. Each state has their own laws about foreclosure sales and the process can be very tricky.