Getting Into the Market Any Way You Can
Buying a foreclosed home is not usually the go-to option when considering a place to stay. However, many people choose to buy foreclosed homes because they suit their needs. In this article, we'll explain how homes become foreclosed, how to buy a foreclosure home and its pros and cons.
What is Foreclosure?
Foreclosure is a lender's process to sell a property when the owner fails to make their mortgage payments. Foreclosure happens because individuals use their homes as collateral to secure loans. Upon foreclosure, the lender repossesses the property and takes steps to sell the house. The lender will aim to sell the property for an amount that equals the loan offered to the owner. Because of this, the price of foreclosed homes is usually lower than their market value.
How to Buy A Foreclosure Home
Buying bank-owned properties or other forms of foreclosed homes is a bit more complex than buying homes from their original owners. Here's a step-by-step guide on how to do it the right way.
1. Work With a Real Estate Agent
Finding foreclosed homes can be difficult, so try to work with a real estate agent with good client reviews. You should have an agent who has good knowledge about foreclosures to help present your interests and ensure a smooth transaction.
You can find the right agent to work with by surveying websites with a database of foreclosed homes in your chosen area. You can also work with realtors with specialized training or a bank's real estate agent.
2. Understand the Various Types of Foreclosed Homes
Your agent will walk you through the different types of foreclosed home sales so you can choose the one that suits you the most. For example, in a pre-foreclosure, a buyer buys the property and bails out the seller before the bank takes it.
In a short sale, the bank agrees to forgive some of the debt because the borrower owes more than the house is worth.
Also, in sale auctions, bidders are allowed to make offers on foreclosed properties at a local courthouse. If you choose to buy at an auction, it means you're buying the home "as is," meaning you're finalizing the deal without any form of appraisal or inspection of the home.
Properties that couldn't get sold at auction are repossessed by the bank and become real estate-owned. The banks can list them on multiple listing services or sell them on auction websites.
The U.S. Department of Housing and Urban Development places the list of available foreclosures on its website for government-owned properties.
3. Get Pre-Approved for a Mortgage.
If you can't pay for a home with cash, then you should secure a mortgage pre-approval letter before making an offer on a foreclosed home. The letter contains proof of funds, which helps the seller ensure you're ready to close the deal before allocating the mortgage.
4. Make a Smart Offer
Foreclosed homes are swiftly taken, so your agent needs to act fast. You can get an idea of comparable home prices from your agent, who will help you run a competitive market analysis (CMA). A CMA is used to get the recent sale prices of comparable properties; this will help you make a good choice that aligns with your budget.
5. Understand the Next Steps
If possible, it's advisable to inspect and appraise the property. Appraisals are important to ensure you're not overpaying for the property and inspections help you note what needs replacing or repairing. Sometimes, you have to buy a property "as is," meaning you won't get the chance to do an appraisal or inspection before you buy.
6. Purchase Your New Home
After conducting an appraisal and home inspection, evaluate the feedback and decide if the home is right for you. With the help of your agent, reach out to your mortgage lender to finalize the purchase and close the deal.
The Bottom Line
Foreclosed homes cost less than other homes because they're usually listed below their market value. So if you're looking for a budget-friendly home, consider foreclosed homes. Another factor that makes foreclosed homes a huge attraction is the potential to make good returns; if you buy a foreclosed property and renovate it, you can make good profits from the sale.
However, buying a foreclosed home comes with maintenance concerns, as extensive repairs can be very costly. You can opt for a renovation loan like a 203(k) to finance the repairs. Aside from the extensive maintenance that sometimes comes with foreclosed homes, securing one might be very time- and energy-demanding. But if you're ready to wade through these obstacles, you can end up with a terrific deal.
Once you've purchased your home, you'll want to look into home insurance.