When scrolling through the various real estate websites and apps, you may find properties marked “in foreclosure”. Often the prices on these homes are quite low and can even seem too good to be true.
So, is a foreclosed house really worth considering? As with anything that’s priced below market value, there are both benefits and pitfalls that come with buying a bank-owned property.
What does foreclosure mean?
Mortgages are known as “secured loans”, meaning every loan has a lien on the property. The lien allows the bank to take control if the homeowner fails to make recurring payments. This gives the bank a layer of reassurance when lending large sums of money.
A foreclosure occurs when a homeowner can no longer make their monthly mortgage payments and eventually defaults on the loan.
- Once this happens, the borrower forfeits their rights to the property.
- The lender who initially approved the mortgage will then try to recover the remaining debt by seizing and selling the house.
Overall, a home that is listed as a foreclosure is owned by the bank.
The Types of Foreclosure
There are a few different types of foreclosures. Each has prominent distinctions that will alter your approach to buying the property.
What is Pre-Foreclosure?
A pre-foreclosed house is in a bit of a gray period – the borrower is already in default, but the property has not yet been offered for sale at auction. During this time, the current homeowners can attempt to sell the property and possibly avoid further foreclosure dealings, which will have a significant impact on their credit.
In a pre-foreclosure, you will be communicating with the current homeowners. They are typically willing or even eager to negotiate with potential buyers. The process should go fairly quickly, as you will not be communicating with the bank.
A short sale occurs when the lender agrees to accept less than what is owed on the mortgage. Typically, this happens when the property is worth less than the outstanding debt.
The homeowner may have borrowed too much originally, or the market could have dropped below the usual fair market value. Regardless, the bank is willing to sell the property short.
When buying a short sale, the bank will handle all dealings, negotiations, and approvals. After submitting an initial offer, you could be waiting while to hear back. This trend will likely continue throughout the entire process. The paperwork will be more extensive and responses from the bank could be few and far between.
Sheriff’s Sale Auctions
A sheriff’s sale is a type of public auction where interested buyers can bid on the property. This could help the lender get paid quickly and recover some of the outstanding mortgage balance.
Auctions take place locally, often at the city or county courthouse. They actually occur more frequently than you may think. You can check the local newspaper or speak with the sheriff’s department.
Purchasing a house at auction is far more simple and faster than negotiating with a bank for months on end. This is because most auctioned properties are paid with cash. You’ll need more capital upfront and pre-approval ready to go. A quick and easy way to get pre-approved is through an online mortgage lender. This will streamline the process and ensure your spending power at auction.
If the property does not sell at auction, it will be repossessed by the bank. When a financial institution acquires a home through a foreclosure, it is known as a real estate owned property, or REO.
You will be purchasing the house directly through the bank that has seized the property. At this point, the previous homeowners will have already been evicted. Typically, the house is sold “as is”. While you can do a final walkthrough and order an inspection before closing, there is really no opportunity to further negotiate with the bank.
How to Find a Foreclosed House
There are many different online outlets to find foreclosures.
- The most common one is multiple-listing service or MLS.
- There are other websites, like Foreclosure.com, which are dedicated to helping buyers search for foreclosures specifically.
- Some financial institutions will also list foreclosed homes on their websites.
- Additionally, many pre-foreclosures and auctions are listed in local county buildings or newspapers.
- You can also reach out to an agent that specializes in foreclosures. Finding the right real estate agent is essential for this type of home purchase and what it entails.
The Advantages of a Foreclosed Home
- Low Prices – Of course, a foreclosed property is almost guaranteed to cost less than comparable homes in the area. They are priced to sell, as the lender is looking to get their money back as fast as possible.
- Clean Title – When purchasing from a homeowner, there’s always the chance that they have unpaid taxes due or an additional lien on the property. This prevents the transfer of a clean title, or your right to own the property. This can delay or even cancel a pending sale. When buying a foreclosed home, however, the bank will clear the title completely.
The Disadvantages of a Foreclosed Home
Most foreclosed homes are sold “as is”. Essentially, you are rolling the dice on hidden issues and needed repairs that are not noticeable during a simple walkthrough.
Additionally, homeowners that have foreclosed on a property have no incentive to keep up with ongoing maintenance. This could result in a snowball effect of certain issues within the house, which are likely getting worse as time goes on.
Ultimately, those problems will become your responsibility. Don’t count on the bank to fix anything. It’s important to set aside a good chunk of cash to invest in home repairs.
The foreclosure process is long and drawn out. Homeowners are given a period of redemption where they can catch up on past payments and earn the property back. This period can last anywhere from a few months to several years.
In turn, if you’re searching online and see a property “in foreclosure” that’s not always the full story. This description could be preemptive, and the bank may not accept offers yet.
Since foreclosed homes are usually listed at reasonable prices, there may be more competition involved.
Plus, the other buyers are often professional investors, who may be harder to compete against. They are typically well-verse on the subject and give all-cash offers.