A home is one of the largest financial commitments most of us make. As the average home price continues to rise, it makes sense that people are looking for ways to make this investment less of a shock to the bank account, especially if you are investing in a second home or a property you intend to rent out. Learning how to buy a foreclosed home could give you an opportunity to save a lot of money. Unfortunately, foreclosed homes can come with their share of costly troubles. That makes it especially important to understand the foreclosure process in order to make the right purchase.
Finding foreclosed—also known as bank-owned—properties isn’t difficult. However, it is just as important to know what to look for while investing in a foreclosed home.
Understand the pros and cons of investing in foreclosed properties
Foreclosed properties often have a lower price tag than other homes, making them an attractive opportunity for investors or homeowners. Another benefit to buying foreclosed homes is that there are government-sponsored financing options available on them.
There may be a variety of issues with a foreclosure too, which need to be taken into consideration. For instance, the home itself may be in poor condition, requiring a significant amount of renovations to be inhabitable or marketable. The need for repairs can be acceptable if the buyer is skilled in those renovations but can become costly otherwise. The length of the buying process can also be a negative situation, especially if a potential homeowner is desperately in need of a place to live or has a deadline to find a home. Any potential buyer of a foreclosed home will also have to compete with professionals who, possibly like yourself, “flip” and sell houses. This added level of competition can lead to higher prices and headaches at auction.
How to buy a foreclosed home in five steps
1. Cash is always best when it comes to buying a foreclosed home. If not, and if they are accepting financing, then you first have to get pre-approved for a mortgage. This is the decision most people will make unless they have adequate cash to buy the property outright. Once you’re pre-approved for a mortgage, you will have an idea of your mortgage rates. This will help you understand what properties are in your price range and what isn’t.
2. Next, find an experienced professional to work with. This could be a real estate agent knowledgeable in foreclosures or a mortgage broker. They will help you find the right foreclosure for your life.
3. Once you have found the property that interests you, you will need to bid at auction or have your real estate agent or broker do it.
4. Assuming the buyer wins at auction, the house will then need an inspection. It’s actually better to inspect a house before buying it on foreclosure, but that is not always an option. There will also be a need to pay off any liens associated with the house after buying it.
5. Once a foreclosure is finalized, the renovation process can begin. As soon as the necessary repairs are made, the new homeowner can move in or put the property up for sale.
Know about the different categories of foreclosures
To begin, there are two primary categories of foreclosed homes: bank-owned homes and real estate owned (REO) properties. Bank-owned homes are in the midst of the foreclosure property, where the homeowner has stopped paying the mortgage and the bank is in the legal process of removing the homeowner from the property. This process can be lengthy, depending on the situation and where the home is located. Once the homeowner is removed from the property, the bank will attempt to auction off the foreclosure. REO properties have already cleared the legal process of removing the homeowner and have gone to auction, but the property did not initially sell while on auction. The property will remain under ownership of the bank or lender and they will continue to try to sell the property, often through a real estate agency.
Do you understand now how to buy a foreclosed home? What is your experience with foreclosure properties?