Buying a foreclosed home is typically inexpensive because mortgage holders are motivated to sell quickly. Whether your goal is to fix and resell or make it your own, buying foreclosed homes is a great option when done right. We asked experts for tips that will help you get the most out of purchasing foreclosed properties.
Here are 25 important tips for buying a foreclosed home:
1. Be Prepared to Deal With Banks
Denise (Deni) Supplee, Co-founder, SparkRental
Dealing with a bank that owns a property is a whole lot different than dealing with an owner. Banks are notoriously slow to respond. There are layers of red tape. This causes delays and even failed deals. So patience is necessary if you want to deal with purchasing a foreclosed home.
2. Contact Your Local Government
Renée Kuperman, Realtor, Best Homes Miami Beach
Have your title company check for liens and open permits as early as possible. Check with the city zoning department to find out the exact procedure to have them removed. Minimize your risks by gathering as much information as you can prior to closing. You don’t want any costly surprises afterwards.
3. Take Time to Visit the Property
Colin Ruggiero, Home Safety Expert, Mesothelioma.com
Foreclosed homes can be a tricky situation, especially if they are being sold sight unseen. As a homebuyer, you should try to avoid purchasing a home without viewing it first, as there are many problems that could be present. If you are going to purchase a foreclosed home, having an adequate budget for renovation work is imperative. You should also factor in the costs of an initial home inspection, which may incur additional expenses such as removing any materials that can be dangerous to your health (e.g., asbestos).
4. Look Into Insurance Claims
Michael Kelczewski, Realtor, Brandywine Fine Properties Sotheby’s International Realty
Review CLUE reports available via LexisNexis to understand insurance claims. The claims provide a data point to understand a property’s condition. Review title abstracts or reports to verify title objections or encumbrances and, of course, always purchase title insurance.
5. Consult With a Lawyer
Maggie Aland, Marketing & Review Editor, Fit Small Business
Securing financing for a foreclosed home can be lucrative as long as you know how to avoid common mistakes. One precaution you need to have is to understand the contract involved in your purchase. Rocket Lawyer is an online legal service provider that offers legal information and document reviews that include contracts involving sale of properties. They can also provide you with a specialized lawyer who can handle your contract writing needs. Visit Rocket Lawyer’s website and get a free trial.
6. Get Your Finances in Order
Jennifer Harder, Founder & CEO, Jennifer Harder Mortgage Brokers
Get your finances in order first. When you are house hunting for a deal, things move fast, so you will want to get preapproval from your lender in advance of beginning your search. You will need a preapproval letter that shows how much you can borrow based on your income and credit score. Also, don’t expect to get your financing from the bank that foreclosed on the house; they are getting rid of a bad asset. You should do your research and find your own lender.
7. Bid Your Highest Price
Sacha Ferrandi, Founder & Principal, Texas Hard Money
Foreclosed properties typically sell very fast and are very competitive. Your best bet to secure the deal is to bid your highest offer to the bank. Of course, search for comparable homes in the area to better gauge a reasonable price to offer. You don’t want to end up purchasing the house for too much and have little return on investment.
8. Check Out the Neighborhood
Shawn Breyer, Owner, Foreclosure Homes In Atlanta
If you’re an investor from Boston and you’re buying foreclosure homes in Atlanta, you will need to have someone evaluate the property for you in person. When evaluating, make sure that you scope out the neighborhood. Just because the house is cheap doesn’t mean that it’s a good deal. The internet may not show that the house’s value could be distressed from widespread crime. You may not be able to recoup the money you invested to purchase and renovate the home because of the neighborhood.
9. Consult With a Real Estate Agent
Keith Reboletti, Real Estate Broker, Sweet Home Park Ridge
Use a real estate agent to go through the process as smoothly as possible. Since these situations can work differently, it’s important to use a real estate agent to be sure that you are doing everything you need to do. Also, many people believe that you’ll get a much better deal with a foreclosed home. However, that is not always the case, so a real estate agent will do a market analysis to be sure the price is a good deal.
10. Market to Pre-foreclosures
David Bokman, Owner, Philly Home Investor
This is one of our favorite strategies when buying homes in foreclosure: buying them directly from the source. Meaning, we market directly to people who are in pre-foreclosure through mailers, cold calling, and online strategies. Once we’re able to get a hold of the homeowner, we are usually able to get in contact with the banks directly and negotiate a great price prior to the property going through the whole foreclosure process. By honing this process, you can save thousands on the purchase price.
11. Get Preapproved Financing
Chris Baumann, Team Leader, Loans & Investments, Socotra Capital
Buying a foreclosed home is great if you are getting a good deal. However, the property may be in need of rehab, and in some cases can only be purchased using cash. It makes sense to try to get preapproved with a lender who is also able to provide rehab money. It is also important to know who is selling the property, and to find out what the closing timeline looks like. Buying a foreclosure might not make sense for most consumers, but if you do your due diligence and investigate the sale as thoroughly as you can, you can avoid some of the potential pitfalls that can turn what sounds like a deal into a tough loss.
12. Read the Bank Addendum Fully
Alyson Silverman, Broker Associate, Keller Williams Calabasas
If your offer is accepted, congrats! Read the entire bank addendum in full, as sometimes they have passive removal of contingencies or other caveats. Realize the bank never lived there since they are taking it over, they know nothing about the home, and are exempt from most seller disclosures.
Because of the potential for huge profit margin, first-time buyers should expect fierce competition from the more professional players in the market. Those who aren’t new to purchasing a foreclosed home may either have more favorable financing, or have investors willing to pay cash (which sellers like). So if you really like the property, get your finances sorted and make an effort to put in your best offer to stay competitive against more financially established buyers.
It’s useful to note that a buyer’s agent is typically paid by the seller via the agent’s listing brokerage, so take time in choosing the right real estate agent for you. It should be someone knowledgeable about the community and can give you an idea of the property’s potential. Your agent should be able to explain your rights as a buyer of a foreclosed property and advise you about the best offer based on comparable homes. Begin your search by calling the bank to get in touch with their Real Estate Owned (REO) department for a list of their real estate agents.
Buying foreclosures at auction can be lucrative, but it’s important to understand how auctions work. Live auctions usually take place on the property being sold and will require you to provide proof that you have the financial means to pay the full purchase price before you’re allowed to participate. Do quick research on the auction so you’re prepared and aware of the rules as well as the requirements.
Foreclosed properties are sold “as is,” so it’s important to do a visit before giving an offer to the seller—and make sure to bring a contractor along. While this may mean extra expense on your part, this is much better than buying a home that seemed fine only to discover that getting the place fixed is way more expensive than you expected.
This issue is about changes in general made on the house by the previous owner. The most obvious point is the possibility that improvements were made to the property by unlicensed professionals or even the owner themselves. It’s going to cause more than safety concerns—if the previous owner made changes to the home without obtaining the necessary permits, this will cause a problem for the new owners when dealing with the local city government officials.
Check for the rules on Right of Redemption for your state. This allows the owner to buy back their foreclosed, sold home for the same amount it was bought plus interest within a prescribed period. To a successful buyer, this is important because they might want to wait for the prescribed period to lapse before fixing the property.
If you’re a buyer looking for a new home from renovating a foreclosed house, you should consider looking into a Housing and Urban Development (HUD) house. Local governments do get the first option to buy foreclosed properties whose mortgages were insured by the federal government. However, if the house is still on the market after 10 days, the listing becomes open to private investors. According to inspectors, HUD houses are considered to be better protected because the federal government takes measures to maintain the property, like putting antifreeze in the traps and drain pipes.
One task that can help you when buying a foreclosed residential property is to ask the right questions. This includes questions you ask yourself and questions you ask the seller to help you arrive with an informed decision. Asking yourself, “How much money will I have after the purchase?” is important because you need to remember that your expenses don’t end after closing the sale. Some of the questions to ask the seller that are often overlooked are: “What is the age of the roof, plumbing, HVAC, wiring, etc.?”, “How long has the property been unoccupied?”, “How was the asking price determined?”, and “Are there more foreclosures in the area?”
One common mistake of first-time home buyers is postponing the question of financing until they find a property they are interested in. It’s important to point out that the really great deals on foreclosed properties sell quickly and there won’t be much time for buyers to work out their financing before some other investor closes the deal. So unless buyers are ready to pay in cash, it’s best to find a lender who would grant a preapproval letter they can present to the bank.
If you’re a first-time home buyer, considering buying a foreclosed home can be a good thing. Some sellers, like Freddie Mac and HUD, give priority to first-time homebuyers, which is anywhere between 18 and 21 days. This gives you the opportunity to look at the listings without having to compete with non-first-timers who usually have better financial standing that sellers would favor.
If you don’t have enough cash, you can always secure a loan to finance your purchase of a foreclosed home. There are a few options to choose from, so find what works best for you. Federal Housing Authority (FHA) loans can help you buy a foreclosed property as long as it meets FHA’s safety and habitability standards. Otherwise, you can get a 203(k) Rehab Loan for properties that are in poor condition.
Don’t forget to account for all the liens when preparing for expenses involved in buying a foreclosed home. Banks and even the municipality can place a lien on a property that they have to maintain and can possibly run up to thousands of dollars. Investigate and have the previous owner resolve any unpaid liens before you close a deal on a foreclosed property.
Like every business strategy, timing is everything. As with buying foreclosures, you need to find leads that will give you the best chance of acquiring the property. Focusing on those in the early stages of the foreclosure process (pre-foreclosure) can give you an advantage. Online directories like Zillow, Foreclosure.com, and REDX can provide you access on listing and pertinent information that includes interior photos and property condition to help you arrive at a timely and informed decision.
Finding the perfect foreclosed home could save you a lot of money. Just remember that any issue with the property will be your responsibility after you close the deal, so make sure you do as much research as you possibly can before deciding. Use these expert tips for buying a foreclosed home to help you get started.
Did we miss out on your go-to tips for buying a foreclosed home? Share them with us in the comments.