Know the ins and outs of buying a foreclosure before you make a move.
WHAT IS A FORECLOSURE?
Foreclosure is the process by which a mortgage lender can repossess property in order to repay outstanding debt if the borrower defaults on their mortgage. In the industry, we also use the term “foreclosure” to refer to the home itself, not just the process. Like short sales, foreclosures are often considered “distressed properties” because of the financial situation of the current homeowner and the physical condition of the property. Unlike short sales, foreclosures are riskier and they typically happen after the lender offers the option to short sale.
Here’s how it works: If the homeowner defaults, they’ll receive legal notice that the foreclosure process is about to begin. This gives them a chance to regain good standing and get back on track with their payments. If they can’t, they can either sell the property in order to avoid foreclosure or they’ll be forced to move out and their lender will repossess the property.
THE PROS OF BUYING A FORECLOSURE
It’s not a pretty process, but there are pros to buying a foreclosure. For one thing, foreclosed homes tend to come at a low price. That’s because the lender doesn’t want to hold onto the home and will likely be willing to offer it at a discount to get it off their books. For that reason, if you’re buying a foreclosure, you could get a great deal in a neighborhood that would otherwise be out of your price range. And yes, that means foreclosures are in all kinds of neighborhoods—even luxury homes can be foreclosed. So if every foreclosure you’ve pictured is a run-down shack, that’s not always the case. Some buyers are able to score really nice luxury homes at low prices.
In the best-case scenario, you pay below market rate for the home, the value appreciates, and you sell the property for more than what you bought it. It’s because of this benefit that buying a foreclosure can be a really good return on investment, especially if you’re in the market for flipping homes.
But if you’re not one for flipping homes and you’re just looking to buy a decent home at a super low price, buying a foreclosure could work for you. One advantage to this is that since the home is vacant, you don’t have to wait for the seller to move out. You get to come home faster and you get in at a low purchase price. Could there really be any cons?
THE CONS OF BUYING A FORECLOSURE
For some home buyers, yes, there are cons to purchasing a foreclosed home. It’s a rigorous process that’s not for everybody, and definitely not for the faint of heart. If you choose to buy a foreclosure, buckle up for an impersonal process. The lender will often see it more as just a business deal so don’t be surprised if the involved parties are very forthright throughout the process (more on this later).
Buying foreclosures can also be very competitive. Since there are many buyers looking to snag a deal that they might otherwise not be able to afford, there tends to be higher competition for the property before it’s owned by the bank. Once the bank owns it, however, there’s not much room for negotiation because they set the price after they’ve taken care of things like eviction, tax liens, and repairs—efforts that demonstrate to their shareholders and/or investors that they’re offering the best price possible. If you bid below the bank’s price, chances are, you’ll be met with a counteroffer.
We mentioned the phrase “distressed properties” before—often the property is in poor physical condition because the homeowner encountered financial hardship, meaning not only were they unable to make their mortgage payments, they couldn’t afford to maintain the home either. And yet sometimes the home is in bad repair because the previous homeowner was negligent. Since foreclosure can be an emotional process with conflict between the lender and borrower, there’s a possibility for the homeowner to take out their frustration on the home.
Another con to buying a foreclosure is the delay in making an offer. It can take weeks to get a response from a bank or servicer, and consequently, this can affect financing. Most lenders have time limits on rate locks, so if your offer hasn’t been accepted and interest rates go up, the property becomes more costly.
HOW DOES BUYING A FORECLOSURE WORK FOR THE BUYER?
Despite the cons, people buy foreclosures every year. That means, for some, the pros are greater. If that’s you, start by doing your research. You can start online just like you would for any other home search, but also check out special listings, public records, and the county courthouse.
Early on in the process, you might want to hire a real estate agent who has experience in foreclosures. They’ll have access to private foreclosure listings and a network of professionals they can connect you with. The process of buying a foreclosure is not your conventional process. You’ll want someone on your side who can help you navigate the tricky twists and turns of it. And like searching for homes online, your agent can help you research the recent sales prices of comparable properties (or comps) before you make an offer on a home. Then, based on the comps, you can write a more competitive offer and get closer to the price you want.
Sounds like a lot of research so far, and we all know that research takes time. That said, don’t be hasty about this purchase. Buying a foreclosure can be risky business. So heed the old adages: Take your time. Prepare for the worst. Don’t sweat the small stuff. And take it one step at a time.
HOW IS IT DIFFERENT FROM BUYING A NON-FORECLOSURE?
Remember that your experience buying a home is going to be vastly different from others’. Turnkey homeowners, for example, might have more wiggle room to go over their budget because their purchase is less risky. When you’re buying a foreclosure, you have to make a budget and stick to it. If not, it could be more costly for you in the end.
You should also keep in mind that this will also be a unique lending transaction. Depending on your lender, it’s likely to be a very impersonal process. For the lender, it’s strictly a business decision. They’ll only go through with the foreclosure if the numbers make sense for their bottom line. However, when you buy a foreclosure through Heritage Home Loans, you’ll always get a personal lending experience. So get in touch with us and we’ll start by getting you pre-approved. Pre-approval is important to the process of buying a foreclosure. It’ll give you greater bargaining power when the time comes to make an offer.
Like buying a short sale, a foreclosure is an “as-is” purchase, so you can expect not to get anything that resembles a seller’s credit, discount, or the cost of any home repairs “thrown in.” When buying a foreclosure, there’s very little compensation for damages on the home, and consequently, very little room for negotiating post-home inspection repairs.
THREE PEOPLE YOU SHOULD KNOW
And finally, as the buyer, there are three people you should keep handy. In addition to your real estate agent and mortgage lender, get a home inspector, a title company, and a lawyer.
- Get a reputable home inspector. “Distressed property” and “as-is” should be keywords prompting you to not only get a home inspection but get one from a very reputable inspector. Your agent should be able to help you with this. Then, once you have your vendor, get a home inspection before you make your offer. This could reveal issues you’re not prepared or willing to handle and you may want to walk away. Better to know these things up front.
- Get a title company that is well versed in foreclosures. The title company’s job in any mortgage process is to run a title search and report. This ensures there are no discrepancies with the title and no liens against the property. In a foreclosure, this will need to be a very comprehensive process. With such a unique transaction, there’s a higher chance your title company will dig up additional liens they’ll need to resolve.
- You might also want to get a lawyer. While your real estate agent can give you great professional advice, they’re not exactly a legal advocate. When engaging in such a risky transaction, it can’t hurt to have a lawyer on your side.
Are you interested in buying a foreclosure? Call Heritage Home Loans today and let’s get started!
Article written by Laura Lopez and reprinted with permission by Cardinal Financial