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As the country continues to distance itself from the 2008 recession, home buyers are experiencing a drop in available foreclosures on the market.
Something to consider if you’re thinking about buying a foreclosed property is that there’s a limited inventory and you could be waiting awhile for one to come along. However, if you can find a foreclosure that’s in the physical condition and location you desire, it can definitely be less expensive than a typical sale. And because many bank-owned properties are vacant, you may be able to move in sooner.
Understanding the process of purchasing a foreclosure property is critical, so we’ve broken it down for you. We’ve added insight from seasoned realty specialist Doug Gartley, associate broker at Rocket Homes.
Different Types of Foreclosures
A foreclosure takes place when a homeowner can no longer make their mortgage payments and is forced to forfeit the home back to the bank.
Foreclosures can be categorized into four different types:
- A pre-foreclosure, or short sale, can occur when the homeowner still owns the property and knows there is a potential for foreclosure. Buying at this stage can be tough because the sellers may be on a tight deadline and the process can be lengthy.
- An auction typically requires cash on hand and should be approached with caution. There can be a lot of risks, such as liens on the title and unknown repairs needed. You may not have an opportunity for an appraisal.
- During a post-foreclosure, the home is known as real estate owned property (REO) by a bank or lender. The bank secured the home at an auction and is now selling the home to recoup what is owned on the property. The bank will likely hire a local real estate agent to put it on the market.
- Government-owned foreclosures are mostly sold “as is,” meaning that any repairs will be your responsibility. The government may repair any structural needs before selling, or you could request a repair. You might have to place an offer or bid to view or inspect the home.
Understanding the different types of foreclosures can give you more realistic expectations and a working timeline when purchasing a foreclosed home.
Purchasing a Foreclosure
There are five steps to the process of purchasing a foreclosure:
- Work with an experienced real estate agent
- Check your credit report
- Get preapproved by a lender
- Get an inspection on the desired home
- Make an offer
Work with an Experienced Real Estate Agent
If you decide to go the route of purchasing a foreclosure, you’ll want to work with an experienced real estate agent or buyer’s agent who has access to a local multiple listings service and can pinpoint the potential deals.
Even better, if the agent is familiar with the bank that owns the home you’re interested in, they’ll be more familiar with the process on how bank-owned homes are sold by that particular bank.
Additionally, a good real estate agent can discuss challenges you could run into with a foreclosed property; every state has unique laws and regulations concerning foreclosures.
When you work with a real estate agent, they will:
- Research what homes are selling for and property values in desired area
- Check county assessor’s office to determine ownership and pricing information
- Ensure your homeownership goals align with the property in question
“There’s no benefit to a client going in a foreclosure purchase alone,” says Gartley. “You should hire buyer’s agents that have experience and will represent you and ensure your interests are protected.”
Gartley also advises against third party sites.
“Avoid sites that will allow you to get ‘inside information’ on foreclosure properties coming down the line,” says Gartley. “This information will not help clients because properties could be in foreclosure from six to nine months before being on the market. Having the information doesn’t always give you an advantage.”
Check Your Credit Report
Check your credit report to make sure your score is in good shape. Banks and lenders can be particularly sensitive to credit issues in foreclosure situations.
Have all of your financing in order before you begin searching for a home. Discuss your options and plans with a Home Loan Expert in order to put together a solid financial package to present when making an offer.
If possible, get a full approval from a mortgage lender who has verified your income and assets. This will give you more negotiating power.
“Whether it’s an REO home or a private seller, you should always want to get preapproved before starting the house-hunting process,” says Gartley.
Additionally, if you get preapproved from one lender and want to purchase a bank-owned property, that specific bank or lender may want you to get preapproved through their company, usually to confirm your eligibility or just simply for the selling opportunity for their company, according to Gartley.
Know that you are not obligated to go with that lender. Gartley asserts that you can still use your preapproval from your original company to qualify for the bank-owned home.
Get an Inspection
As you look for a home, keep in mind that when you buy a foreclosure, you’re buying it as-is. So, it’s very important that you inspect the property as part of your offer process.
Get an inspection done and make your offer contingent on satisfactory results from the inspection.
“Typically, banks will permit an inspection contingency period as part of the offer,” says Gartley.
A Word About Repairs
Foreclosed homes tend to have little-to-no room for negotiation. Since you’re buying a home as-is, you’ll be responsible for any repairs.
As a safeguard, you should prepare to spend a little more on repairs in a foreclosed home. Find out how long the house has been unoccupied and determine if the previous homeowner performed routine maintenance on the home.
Beyond your personal opinion of the home, getting a certified inspector to tour and inspect the property is a must in a foreclosure situation. You should prepare yourself for the worst so you don’t face unwelcome surprises.
“A home inspection is a necessity,” Gartley asserts. “Don’t skimp here. This is worth spending the couple hundred dollars to have a certified home inspector go through the home. Make sure they check for any signs of mold or varmints. Also have the mechanicals checked: water heater, furnace, air conditioner, plumbing and so on.”
It’s also a good idea to check with your local building department to find out if there are any open building permits that could present issues post-closing.
Make an Offer
If the home is in pre-foreclosure (short sale) your real estate agent will need to present the offer to the individual who still owns the home.
If you’re looking at a home that’s about to be sold at an auction, you’ll need to contact the trustee/attorney to ask any questions about the house before the auction.
If the house is bank-owned, your agent will present your offer directly to the listing agent, hired by a bank to work with real estate agents representing clients. Buyer’s agents never have direct contact with the bank.
Be aware that when you get a foreclosure, your deed type is different than a private sale and only protects the bank from previous owners.
When you purchase a foreclosure, you’ll receive a sheriff’s deed, which does not come with the same assurances or warranty that a normal deed comes with and only protects the home when it’s under bank ownership.
If you are purchasing a foreclosure, you need to get title insurance that provides an owner’s policy to ensure that nobody coming back from the past can lay claim on the home.
While you might be looking for a good price on a home, remember that not all foreclosures are good deals. Some can offer more trouble than the lower price tag is worth.
If you’ve decided you want to pursue a foreclosed property purchase, the right real estate agent can make all the difference. Rocket Homes has real estate agents across the country who’ll work with you to find the right home that fits your budget and lifestyle.
If you have any questions, let us know in the comments below!
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